Donald Trump is returning to the White House without many of the guardrails of his first term.
Many Never-Trump Republicans in Congress have converted or been defeated. Former economic adviser Gary Cohn and other anti-tariff voices are not likely to be welcome in the new Trump administration. Special counsel Jack Smith intends to step down. And the Supreme Court has granted presidents far-reaching immunity from prosecution.
Yet there is another force that could deter Trump from some of his most extreme instincts: the $50 trillion US stock market.
During his first term, Trump obsessed over market moves, viewing the Dow Jones Industrial Average as a real-time barometer of his success. Trump regularly tweeted out even the most mundane market milestones, sharply departing from the hands-off approach his predecessors and successor took with the market.
More recently, Trump was “euphoric” over the market’s initial surge after his sweeping victory this month, sources told CNN’s Kayla Tausche.
A market meltdown triggered by a Trump policy idea – say, unthinkably high tariffs on China or a push to seriously mess with the Federal Reserve – could at least give the president pause, if not force him to back down altogether.
“I don’t see Congress or the courts limiting the president’s authority. Ultimately, the only entity that has real power over the president’s thinking about his agenda is the stock market,” said Isaac Boltansky, director of policy research at BTIG.
Investors could react very negatively if Trump made a move to push out Fed Chair Jerome Powell, with whom Trump has had a complicated and, at times, contentious relationship.
During Trump’s first-term trade war with China, markets tumbled multiple times at least in part due to fears about Trump’s trade policy.
For instance, in December 2018 markets were in turmoil due to fears about the US-China trade war. That market turbulence left Trump hungry to strike a deal with Chinese President Xi Jinping during a high-stakes meeting in Argentina, sources told CNN at the time. When markets failed to rebound, Trump expressed anxiety about plunging stocks and even worried the losses could damage him politically.
It’s easy to see how a similar story could play out in 2025 as Trump has vowed to impose 60% tariffs on China, a leading US trading partner and source of supplies and parts for American companies.
Economists have warned that Trump’s China tariffs and proposals for 10% to 20% across-the-board tariffs on all US imports will be inflationary.
“Donald Trump cares about independent validators. And the biggest independent validator of his success is the market. It’s a daily voting mechanism,” said Ed Mills, Washington policy analyst at Raymond James. “It serves as a potential binding restraint to aggressive policies.”
Not everyone is sold on the idea of the market acting as a guardrail.
Jeffrey Sonnenfeld, founder and president of the Yale Chief Executive Leadership Institute, told CNN that Trump is unlikely to heed concerns voiced by investors.
“There is zero chance that he will take personally any negative feedback from the stock market,” said Sonnenfeld. “If anything is negative, the attribution is to anything but him. He’ll blame Democrats, the drug companies, the tech companies – anybody. It will never be his fault.”
Now, the spotlight has shifted to the bond market.
While the stock market initially celebrated the election results, the bond market did not. Treasury bonds tumbled in value, sending yields surging, in part because of concerns that Trump’s policies will add trillions to the national debt and pump up inflation. Although investors have begun to anticipate faster US economic growth, they’re also bracing for fewer interest-rate cuts from the Fed.
If bond rates spike too high, they could slow down growth by raising borrowing costs – especially for mortgages and business loans.
Higher bond rates can also depress stock prices by providing competition from normally boring bonds and making stocks look more expensive by comparison.
This has already started to play out in recent days, contributing to a retreat from record stock highs.
“The sudden move up in 10-year Treasury yields (and the related inflation and deficit concerns) is one of the main things spooking equity investors,” Lori Calvasina, head of US equity strategy research at RBC Capital Markets, wrote in a note to clients on Monday.
While Trump has called for massive new tax breaks and a full extension of the 2017 tax law, the bond market could have other plans.
If bond investors start to rebel against the idea of spiking budget deficits, that could ultimately doom Trump’s efforts in Congress.
“This is going to come to a head, starting in the bond market,” said Boltansky. “The bond market vigilantes will tell us if they are willing to buy the paper we are issuing.”
A similar story could play out if investors and CEOs start to balk at Trump’s plans to deport millions of undocumented workers – a move that could also lift inflation.
Of course, it’s not clear how severe a market reaction would need to be before it would get Trump to recalibrate.
“What we don’t know is how much pain he is willing to take,” said Boltansky.
We may be about to find out.
