What the election outcome may mean for investors

With Republicans taking control of both the White House and the Senate, extending tax cuts is likely to take center stage next year. But with deficits and debt hitting record highs, plus the final partisan divide in both chambers of Congress still up in the air, there will still be plenty to debate before any proposals become law. So it's important for investors to have a long-term financial plan that's flexible enough to adapt to a range of possible outcomes.

Here's what to watch for in the months ahead.

Taxes

Many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Trump has said extending key provisions will be a top priority for his administration.

"We expect President-elect Trump will set the contours of the tax-policy agenda," says Alice Joe, vice president of federal government relations at Fidelity. "But Congress will ultimately determine the components of a package, its size, and whether it will include additional tax cuts promised during the campaign and potential budget offsets amidst unprecedented debt and deficit levels."

The TCJA's expiring provisions include a top income tax rate of 37%, a top capital gains rate of 20%, higher standard deduction levels, and higher federal estate- and gift-tax exemptions. Trump has discussed further potential changes, including eliminating taxes on tips and Social Security benefits, and further reducing the corporate tax rate to 20% or even 15% (the TCJA permanently lowered the corporate tax rate to 21% from 35%). Vice President-elect JD Vance has also proposed increasing the Child Tax Credit to $5,000, from its current level of $2,000.

Extending the status quo and more may be too costly for some in the Republican party, so budget offsets could emerge in unexpected places.

Tariffs

While President-elect Trump needs Congress to legislate tax-policy changes, he may use his executive authority to push for other key priorities.

Trump imposed certain targeted tariffs during his first administration—which were largely kept in place, and then expanded upon, by the Biden administration. During the 2024 campaign Trump proposed more sweeping levies of up to 60% on imports from China and 10% on all foreign goods.

Debt and deficits

Says Joe: "Extending the TCJA tax cuts for the next 10 years could add up to $4.6 trillion to the federal deficit.¹ That high price tag reduces the likelihood that all expiring provisions will be extended outright. Instead, there’s likely to be some give-and-take."

Those negotiations will take place under the shadow of a record federal deficit. The current suspension of the US debt limit (i.e., the "debt ceiling") ends on January 1, 2025, at which point Treasury Secretary Yellen may need to invoke so-called extraordinary measures so that the federal government can continue to meet its obligations—potentially delaying debt-ceiling talks until the summer.

While the federal government has been running significant deficits for years, Dirk Hofschire, managing director of research for Fidelity's Asset Allocation Research Team, says that the higher level of interest rates might bring a new sense of urgency to the issue in 2025. The US is expected to spend more on debt interest this year than it does on national defense.² In 2025, interest payments as a percent of gross domestic product, or GDP, will reach its highest point on record since the government began collecting such data in 1940.³

"US government debt relative to GDP has tripled in the past 2 decades, but it hasn't been a significant issue for the financial markets because interest rates were low and debt service manageable," Hofschire says. "If interest rates stay around where they are today, the 2025 fiscal debate will take place in a different context that has the potential to create interest-rate and market volatility."

What it may mean for investors

Investors often feel more bullish when their preferred party is in power, and more bearish when the opposing party is in office. While policies do matter, history has shown that markets are nonpartisan and have historically risen under nearly every partisan combination.