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US Public Policy Summary | North America

Core Content

This document provides a comprehensive overview of the economic and market implications of the first 100 days of the Trump administration, focusing on trade policies, fiscal measures, and their effects on various sectors and regions. It outlines the current state of US policy, the potential for future changes, and the associated risks and opportunities for investors.

Key Market Views

• Economic Outlook: Despite the tariff pause, the report suggests that the US economy will experience slower growth and higher inflation in the coming years. The long-term outlook remains unchanged, with the expectation of real GDP growth at 0.6% in 2025 and 0.5% in 2026.
• Inflation and Unemployment: Headline inflation is expected to rise to 4% by year end, while unemployment is projected to reach 5% by 2026.
• Federal Reserve Policy: The report anticipates that the Fed will not begin cutting interest rates until March 2026, due to the faster rise in inflation compared to the increase in unemployment.

Policy Impacts

• Tariffs:
  • The tariff pause has provided some relief to retailers and hardware stocks, which had faced significant cost pressures.
  • However, China-specific tariffs remain high and are expected to persist, with an average rate of 17% on 60% of imports.
  • Mexican and Canadian tariffs are partially lifted for USMCA-compliant goods, but non-compliant goods still face high tariffs.
  • Potential sector-specific tariffs on copper, lumber, semiconductors, and pharma are under consideration.
• Fiscal Policy:
  • The House's adoption of the Senate budget resolution increases the risk of wider deficits.
  • The TCJA extension is scored at nearly zero cost, but the report remains cautious about the potential for deficit expansion.
• Market Reactions:
  • Stocks exposed to China tariffs underperformed following the reciprocal tariff announcement.
  • Hardware stocks saw a 70% reduction in tariff costs.
  • LatAm economies are expected to see differentiated price action, with Brazil and Colombia offering the most attractive valuations.
  • Emerging Market (EM) sovereign credit is at risk due to tariff announcements, with higher spreads and lower returns expected, and High Yield (HY) lagging Investment Grade (IG).

Key Policy Catalysts

• April 20: Defense, Interior, Agriculture, and Energy identify federal lands for leasing.
• April 30: OMB concludes trade investigation into foreign subsidies.
• May 1-15: Treasury publishes estimate of debt ceiling X-date.
• May 4: Treasury & Commerce submit plan to establish a US sovereign wealth fund.
• May 5: Treasury evaluates how to establish a bitcoin reserve.
• May 26: OMB submits report on fiscal impact of tariffs; SMID Cap Biotech and MAHA Commission discuss reforms.
• June 15-17: G7 Summit.
• June 19: Pause on TikTok ban expires.
• June 24-25: NATO Summit.
• August/September: CBO estimates debt ceiling X-date.
• September 23: Arizona special election.
• September 30: End of FY2025.
• November 4: Texas special election.
• December 31: Most provisions of the Tax Cuts & Jobs Act expire.

Investment Implications

• Sector Exposure:
  • Hardware and Semiconductors have seen relief from tariff costs.
  • Consumer and business confidence is impacted by policy uncertainty and market selloffs.
  • Defensive and domestically-driven Japanese equities are preferred due to ongoing tariff pressures.
• Investment Banking Clients:
  • Investment Banking Clients (IBC) have different stock rating distributions compared to other clients.
  • Overweight and Equal-weight ratings are more common for IBC.
• Stock Ratings:
  • Morgan Stanley uses relative ratings (Overweight, Equal-weight, Not-Rated, Underweight) rather than traditional Buy, Hold, or Sell.
  • Overweight corresponds to a Buy recommendation, Equal-weight to Hold, and Underweight to Sell.

Analyst Certification and Disclosures

• The analysts (Michael D Zezas, CFA, Ariana Salvatore, Bradley Tian) certify that their views are not influenced by compensation for specific recommendations.
• Conflict of Interest: Morgan Stanley may have business relationships with companies covered in research, including market making, fund management, and investment banking.
• Disclosure Requirements:
  • The report includes important regulatory disclosures for all subject companies.
  • Morgan Stanley Research is subject to FINRA requirements and is not intended as investment advice.
  • The report is not tailored to individual investors and does not constitute an offer to buy or sell securities.

Additional Resources

• Webcasts and Podcasts:
  • Topics include tariff impacts, market outlook, regulatory debates, and economic forecasts.
  • Key speakers include Michael Zezas, Ariana Salvatore, Bradley Tian, Michael Gapen, and Seth Carpenter.
• Exhibits:
  • The document includes several exhibits showing market reactions to tariff changes and policy impacts.

Conclusion

The report emphasizes that while the tariff pause has provided some relief, policy uncertainty and economic risks remain significant. Investors should be cautious and consider defensive strategies, especially in sectors exposed to high tariffs or geopolitical tensions. The fiscal policy environment is also a key concern, with potential for deficit expansion and market volatility.