Trump’s ’Liberation Day 2.0’ risks drastic policy change in 2028 - BCA Research

President Donald Trump's recent increase in tariffs against nations like Canada has fueled expectations that Democrats will gain control of both U.S. chambers in the upcoming midterm elections, according to BCA Research. The brokerage also forecasted a year or two of trade wars followed by the rise of left-leaning policies in 2029.

BCA highlighted that Democratic policies are more favorable towards homebuilders, green energy, and healthcare equipment, as opposed to healthcare, consumer staples, and more cyclical stocks. President Trump has reiterated his tariff policy through 2027 and warned of potential retaliations from other countries. While the U.S.-Canada trade war may end in a mild manner, the subsequent phase of the trade war poses a higher risk of global retaliation, particularly with China, BCA analysts stated.

Trump's tariff crackdown, dubbed "Liberation Day," had an immediate negative impact on Wall Street, causing the S&P 500 to drop 10.5% over two days and enter a correction phase. However, following a 90-day tariff pause, the market experienced a remarkable recovery, with the S&P soaring 9.5% to its best intraday gain since the 2008 financial crisis.

Despite Trump being unable to run for re-election in 2028, he still faces limitations on his tariff use in the final two years of his term. This situation increases the likelihood that he will raise tariffs but subsequently reduce them when stock and bond prices fall significantly, according to BCA analysts. In February, the U.S. Supreme Court ruled that Trump exceeded his authority under the 1977 International Emergency Economic Powers Act (IEEPA) in implementing the Liberation Day tariffs, but Washington managed to circumvent the ruling by imposing tariffs through different legislative avenues.

BCA Research cautioned that the new tariffs would not benefit the Republican Party during the midterm elections, as Trump's approval rating on handling the economy is at a "net -27%" and support for tariffs stands at only 17% among independent voters. Analysts predict that election years typically yield slightly lower stock market returns compared to non-election years, but 2026 has defied this trend.

Moreover, midterm years usually experience the lowest returns, which is not a concern at present. The tactical volatility expected around the election should not derail the bull market in the final months of the year, BCA's analysts concluded.