US Strategy Weekly: Trumponomics

This week, as President Trump approached his one-year anniversary in the White House, the Wall Street Journal wrote “economists have learned to stop worrying about Trumponomics” and are now forecasting GDP growth to exceed 2% this year. In our view, even a 2% estimate may be too conservative for 2026; still, it is obvious that the stagflation forecasted for 2025 never came to pass. December’s core CPI decelerated to 2.6% YOY, down from 3.3% YOY in January and GDP was running at a hot 4.3% pace in the third quarter.

President Trump has proven the media wrong about the economy; however, he continues to find new and bigger ways to agitate them. This week, along with threatening to place tariffs on countries that disagree with his view on acquiring Greenland, a 10% cap on credit card interest rates, he signed an executive order that implied defense contractors “are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product, on time and on budget.” In short, he wants defense companies with government contracts to invest in their businesses and become more efficient, instead of repurchasing stock or paying their top executives salaries of $5 million or more a year. In line with this, Defense Secretary Pete Hegseth has made overhauling Pentagon acquisition policy a priority and pledged to broaden its range of vendors with more startups and commercial companies. In our opinion, this executive order is Trump being Trump, i.e., a businessman and a disruptor, and like any normal consumer, he wants value when spending tax-payer dollars. The intent may be commendable, but the approach is creating a major backlash among corporate leaders and may generate more harm than good in the longer run.

Nevertheless, we disagree with the following Wall Street Journal statement: “Stock buybacks, like dividends, return capital to investors. They also boost earnings per share and help propel stock prices, which is why many investors prize them and would recoil at the notion of government interference.”

Much like our argument that tariffs are not taxes, we believe stock buybacks are not dividends. Stock buybacks make earnings-per-share look better, but changing the denominator does not mean real earnings power (the numerator) has grown nor does it guarantee higher stock prices. We also disagree that buybacks are “prized” by investors; the real return on capital for equity investors is a combination of rising stock prices and dividend payouts. Stock buybacks do not guarantee higher prices to investors, whereas stock dividends represent real money in the pockets of investors. Moreover, dividends are typically a guaranteed revenue stream to shareholders.

We do agree that government interference is the antithesis of capitalism. However, government interference has been a part of every administration, although the interference is usually done behind closed doors. For example, it was revealed that government agencies controlled social media posts and medical studies regarding COVID-19 and vaccines several years after the fact. Vaccines continue to directly impact public health and wellbeing. Equally important, government-mandated vaccines resulted in extraordinary earnings gains for the pharmaceutical industry; yet the media has never investigated this connection. The current administration on the other hand, is unusually open and transparent, perhaps too much so and the chaos this creates is problematic for those who like order and tranquility.

As we go to print, President Trump is on his way to Davos, Switzerland, to speak at The World Economic Forum (January 19-23, 2026), an annual gathering of global leaders in business, government, and civil society. It comes at a time when Trump has upset the global community with his statement that there is “no going back” on his goal to control Greenland for national and world security. Moreover, the threat to impose 10% tariffs on the eight European countries that oppose his view has galvanized European leaders against President Trump. Ironically, Trump is threatening more tariffs just as the world awaits a US Supreme Court decision on the legality of the administration’s use of an emergency law to enact tariffs. Nonetheless, at a midday White House press conference, the President hinted that there may be a pathway that leads NATO nations to agree with his view. In short, it will be fascinating to watch egos colliding in the Swiss Alps this week.

There was a flurry of economic releases this week and the PCE deflator for October and November and the second estimate for 3Q25 GDP will be released later this week. Last week’s November’s PPI release showed final demand prices rising 2.9%, up slightly from October, but down from September. December industrial production rose 2% YOY, but utility production of 2.3% YOY was key to the strength. December’s existing home sales were surprisingly strong at 4.35 million units (annualized) which was a 1.4% YOY increase. At that pace the months of supply fell to 3.3 from 4.2 months in November. The median single-family home price was $405,400, up 0.4% YOY. However, the January NAHB housing index weakened to 37 from 39 and remains well below the breakeven 50 level. See page 5. The NFIB small business index inched up to 99.5 in January, representing the eighth consecutive month above the long term average of 98. See page 4.

In our opinion, the most important release of the week was the US current account deficit (trade plus investment income) which narrowed to $226.4 billion, or 2.9% of GDP, in the third quarter of 2025. This was $22.8 billion lower than the revised second quarter deficit of $249.2 billion, or 3.3% of GDP. The smaller deficit was the result of a few factors, including a shift from a deficit to a surplus in net income payments, a larger surplus in services, and a smaller deficit in goods. The importance of this is that deficits subtract from GDP. As deficits decline, GDP will strengthen. See page 3.

The current administration, Secretary of the Treasury Scott Bessent in particular, is focused on both US deficits, including the fiscal deficit. At the end of 2025 (December), the 12-month sum of monthly fiscal deficits represented 5.4% of nominal GDP (3Q25), down from 5.7% at the end of the fiscal 2025 year and down from the 6.2% seen at the end of fiscal 2024. This 5.4% should be lower once nominal GDP for the fourth quarter of the year is released. The goal of the administration is to get the fiscal deficit to 3% of GDP or less, and to have economic activity above 3.5%. This combination would reverse the unsustainable trend seen in 2024. In the long run it should also lower long-term interest rates.

There have only been twelve trading days in 2026, but they have been interesting ones. Despite January 20^th’s 871-point decline in the Dow Jones Industrial Average, the index is up 0.9% year-to-date. The Dow Jones Transports are up 2.9%, the DJ Utility index is up 1.5%, the S&P 500 is off fractionally, and the Nasdaq Composite is down 1.2%. However, the Russell 2000 index is up a stellar 6.6% year-to-date and has been a significant outperformer in 2026. This rotation of leadership among sectors and from large-cap to small-cap equities is characteristic of a healthy bull market cycle. And while this week’s decline — sparked by a 19-basis point jump in Japanese government bond yields and anxiety related to Greenland — was the largest since October 9, 2025, it did not generate a 90% down day. Our view has not changed. The 2025 equity market was driven by better-than-expected earnings growth, and we expect the same will be true in 2026. Trailing 12-month earnings growth is currently 14.3% versus the long-term average of 8.1%. See page 6. We remain a buyer of dips.

Gail Dudack

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