Institute Alert

• In sorting through President Trump’s first-week executive orders, we believe that deregulation and tax cut extensions will help the economy by more than targeted tariffs and immigration restrictions hurt.
• But a move to more aggressive tariff, immigration, and budget policies that may undercut the economy, raise inflation, or spike bond yields higher likely would weigh on market performance.

• If moderation continues in tariffs and immigration restrictions, our guidance remains focused on using short-term fixed income and cash to buy U.S. large-cap equities and longer-maturity fixed income, especially on pullbacks.

Specific deregulation action has been thin so far, but we continue to expect that the Energy and Financials sectors will be the first targets. Once President Trump has his regulatory leadership team in place, we believe an eventual step would be to dilute capital requirements for banks and loosen antitrust enforcement, which could lead to further pickups in merger activity.

Similarly, on the Energy front, the administration has suggested a goal to remove the target for 50% electric vehicles by 2030, which points to an expected rollback of Corporate Average Fuel Economy standards for cars. There have been executive orders to limit federal loans to underwrite a range of renewable energy-related projects under current law. This does not impact ongoing tax credits and subsidies for projects, which would have to be legislated. Other orders open additional space in Alaska for oil exploration and rescind the Biden administration’s recent order to limit drilling along the coasts. There is industry optimism for streamlined permitting of midstream infrastructure, but this likely requires Congressional legislation to have the full impact.

Our view is that the $500 billion Stargate project announcement reinforces the early innings of an infrastructure capital expenditure buildout trend that has been underway since late 2022. The announcement expands the scale, including funding from sovereign nations and public and private companies within the broader technology ecosystem.

Over the weekend of January 25-26, Chinese startup DeepSeek launched its latest Artificial Intelligence (AI) models with a claim that they are at least as good as leading U.S. models but at a fraction of the cost. The claim prompted selling in U.S. technology stocks on January 27. We think the selling is overdone. DeepSeek appears to have achieved competitiveness through innovative techniques, and we think there is room for U.S. companies to adjust their training processes. However, the company’s January 23 “DeepSeek V-3 Technical Report” notes only mentions the cost of training, which is only typically a small fraction of the total cost, which includes substantial spending on prior research, experiments, architecture and data. Moreover, the DeepSeek report may have omitted the extent of its reliance on high-end chips, due to political sensitivity about U.S. export controls on such chips. This point was not mentioned in the DeepSeek report but these controls may limit China’s competitiveness in the future.

Consequently, we expect AI development to require increasingly large investments in data center clusters. We would acknowledge that it is not yet clear how all the financing sources will make their contributions. Of the announced $500 billion figure, only a fraction is identifiable based on existing project activity. In addition, based on the scale of this project and the partners involved, we believe that a substantial portion could need to be financed by debt, rather than internally sourced funding, as has been the case with the largest hyperscalers. This in turn could represent an incremental risk to the broader data center capital expenditure wave moving forward.

The announcement does not necessarily imply that the Trump Administration means to pick winners and losers. Some investors may view impressing the president with investment plans as currying favor for various businesses that they own. Tariffs (and the resulting exemptions that companies request), evolving energy priorities, and more muscular involvement of the bully pulpit may encourage this thinking. We don’t typically view government policy as deciding an investment thesis, but preparation for higher single-stock volatility is prudent.

With or without this latest deal announcement, however, we expect the pace of data center construction to grow at a 10% – 13% compounded annual growth rate from 2024 through 2029.¹ In the U.S., this industry already accounts for roughly 4% of total nonresidential construction and has been accounting for the majority of dollar volume growth in the industry since early 2022.² Material outlays on data centers, network infrastructure, the grid, and power generation are increasingly relevant potential earnings growth opportunities for a wider array of companies, in our view.

Data from the U.S. Bureau of Land Management and the U.S. Energy Information Administration (EIA) show that crude oil production in Alaska fell between 1999 and 2023, whether or not companies were bidding for Alaskan tracts. Drilling, and ultimately production, comes down to the global supply/demand balance, which determines the price.

U.S. policy could yet influence that balance. As an example, President Trump has indicated his goal to refill the U.S. Strategic Petroleum Reserve (SPR), which we believe would stimulate production to eliminate the SPR’s shortfall of 300 million barrels. In addition, U.S. production might need to increase if the U.S. expands sanctions added recently on Russian oil exports to include Iranian production, or if the U.S. adds tariffs to Canadian oil exports. The Canadian tariff example could be particularly impactful. The EIA’s December 2024 report showed that the U.S. imported 4.0 million barrels per day from Canada in October 2024 (latest data). Should Trump follow through with 25% tariffs, U.S. refiners may ultimately turn to comparatively cheaper domestic production. The bottom line is that it is not yet clear if U.S. recent executive orders will impact global prices.

We believe that global demand for liquified natural gas will grow, especially as Europe seeks to diversify its energy sources away from Russia. However, President Trump’s order to rescind the export cap on natural gas exports is only the first step in a long process to increase production to meet this demand. The reason is that storage and liquification facilities take years to complete but need to be built before extraction.

The scope for legal challenges to executive orders has increased as a result of the U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo ruling, which overturned the Chevron doctrine.³ Several executive orders already face court challenges on the grounds of exceeding presidential authority, and others are likely to follow. For example:

• There already has been a staying order on birthright citizenship pending a court review.⁴
• The return-to-work mandate for Federal workers runs up against union contracts covering 56% of workers, including 10% of all federal jobs deemed as remote.⁵
• Withdrawal from the World Health Organization ultimately may violate Congress’ power of the purse.⁶
• The order to pause IRA disbursements that promote alternative energy and boost electric vehicle development faces court challenges and may prompt state efforts to compensate for the loss at the federal level.⁷
• Finally, we recall that efforts to roll back federal climate and clean air regulations were turned back during the first Trump administration.⁸

During a December 2024 interview, then-President-elect Trump reversed his position on H1-B visas and more recently has signaled an openness to visa approvals if a worker graduated from a U.S. university.⁹ More generally, the administration appears to be moving to curb existing channels for legal immigration, for example, by reinstating a travel ban from some countries with Muslim majority populations, and by revoking a program that allows tens of thousands of Haitian immigrants to live legally in the U.S.¹⁰ Legal challenges face difficulties after several federal courts altered precedent case law to favor such restrictions.¹¹

Legal and undocumented immigrants have offset slowing labor-force growth in the U.S. in recent years. According to U.S. Labor Department data, the 2024 increase in foreign-born workers (11.7 million) exceeded the loss of native-born workers (8 million). Undocumented workers now may exceed 9 – 9.5 million, based on Pew Research Center estimates through 2022.¹² As the labor force shrinks, we would expect wage and price inflation to rise. Labor Department data show that the industry impact of undocumented workers is highly uneven. The highest is in construction (with a 13.7% share of employment), closely followed by agribusiness (12.7%), then hospitality (7.1%) and maintenance and other general services (6.5%).

Congress is still in the maneuvering stage for raising the debt ceiling and for extending and expanding the Tax Cuts and Jobs Act (TCJA) by the end of the year. Bargaining could well go right down to the wire, when the U.S. Treasury projects it will run out of cash (the so-called X-date) sometime between June and August 2025. The latest offer from House Republicans is for a $1.5 trillion increase in the debt ceiling (until 2026) in return for $2.5 trillion in mandatory net spending cuts (for example, Medicaid) over the next decade. Trump’s demands for eliminating the debt ceiling or suspending it until 2029 are possible but seem unlikely, given the leverage the ceiling currently gives opposition Democrats in Congress.

The risk is that the timing of the X-date could entangle the debt ceiling debate with tax cut proposals and a continuing resolution to fund the government through September 2025. We believe that Congress will extend the 2017 TCJA tax cuts, but additional cuts could be more difficult to pass. The tax exemption for tips already appears to have fallen to opposition by House Republicans.

The next fiscal 2025 funding deadline is March 14, but a harder April 30 deadline triggers automatic 1% across-the-board spending cuts. The House GOP soon may be shifting its debt-ceiling strategy away from a partisan reconciliation bill to a vote tied to California wildfire relief or to the fiscal 2025 funding bill as a lure for Democratic votes.

Lastly, the House GOP still favors Trump’s “one big, beautiful bill” approach, tying border security, spending cuts domestic energy, and the tax bill into one big package by the hard end-April deadline. We believe this will be difficult to pass, given the likelihood of a one-vote GOP majority, and little to no Democratic support.

The focus of early executive orders around immigration has been on tightening southern border security and overriding birthright citizenship for those with undocumented immigrant parents. However, the orders offered few details around deportation logistics, which we believe will be difficult and costly to achieve to the full extent President Trump has described.

The one big tariff threat announcement — a new, 25% tariff on imports from Canada and Mexico on Feb 1—was tied, in part, to accusations of porous borders north and south for the entry of illegals. These tariffs, if implemented, would be more than symbolic. The two target countries are the top two export markets and rank second and third in U.S. imports (including manufacturing inputs). Autos are most exposed to these new trade restrictions. In addition, many imports from Canada and Mexico come from U.S. companies situated in those countries, and tariffs could endanger the profits of such companies.

Trump also floated a 10% tariff on China again, to be implemented as soon as Feb 1, but tied that to fentanyl being funneled to the U.S. through Mexico and Canada. And there was a mention of tariffs on Europe to reduce the U.S. trade deficit. We believe the emerging point on these tariff threats — particularly the delay in punitive tariffs on China, and the demands that Europe and Asian countries buy more natural gas to avoid new levies — suggest the president may have more interest in using tariffs transactionally, to increase U.S. exports, rather than to divert purchases from these countries.

We find it interesting that the Euro STOXX 600 Index (in U.S. dollars) rose to a two-month high, apparently with a sigh of relief at dodging U.S. tariffs, for now. We take this rise in European equity values as a sign that Trump means to negotiate, rather than punish. The U.S. dollar has retreated from a 26-month high against the euro, which is also reassuring, if not conclusive about potential future tariff threats. While we will not ignore the potential for tariffs, rhetoric is not the same as implementation, and for now, markets are breathing that sigh of relief.

So far, limited but positive capital market reaction has accompanied the flurry of executive orders. For example, the S&P 500 Index rose 4% in the new year, through January 23. We believe the muted response to executive orders has much — but not everything — to do with the fact that the president eschewed aggressive tariffs in favor of tariff threats as leverage to negotiate limits on immigration and fentanyl inflows. A similarly slow start to immigration restrictions may have brought some relief to equity investors. The announcement of a large investment in AI infrastructure also appears to have supported gains in technology-related companies.

A second explanation for early-year capital market action is that pricing is adjusting based on market evaluation of how strong the economy and inflation may be this year. The S&P 500 Index clearly has risen in response to favorable fourth-quarter earnings, and another positive quarter is shaping up now. In other markets, the U.S. dollar has pulled back from recent gains against developed and emerging market currencies, and the 10-year U.S.

Treasury yield has fallen since mid-January. All these early-year moves took support from softer-than-expected December producer and consumer price inflation and predate the initial spate of presidential executive orders.

Bottom line: We believe the large number of initial executive orders shows a strong determination to strike while the political momentum favors the president. Yet, aggressive policies on tariffs and immigration — and even the budget — could undercut the economy, raise inflation, or spike bond yields higher, which could potentially lose voter approval and switch control of Congress at the midterm. So, we see a benefit to balancing policy goals and economic support. Specifically, we believe that deregulation and tax cut extensions will help the economy by more than targeted tariffs and immigration restrictions hurt. While that balance holds, our guidance remains focused on using short-term fixed income and excess cash to buy U.S. large-cap equities and longer-maturity fixed income, especially on pullbacks.

¹ Vertiv Holdings November 18, 2024 investor presentation.

² Wells Fargo Investment Institute analysis of Bureau of Economic Analysis data.

³ The ability of the president to mandate regulations via executive order could be complicated by the June 28, 2024 Supreme Court ruling against the so-called Chevron Deference, which had required lower courts to defer to federal-agency interpretations of statutory requirements.

⁴ BN, “Judge Temporarily Blocks Trump Birthright Citizenship Order,” January 23, 2025.

⁵ WPT, “Trump wants Federal workers back in the office, December 26, 2024.

⁶ The Impoundment Control Act bars the executive branch from withholding funds that threaten to default on federal financial obligations funded by Congress.

⁷ Reuters, “White House says order pausing IRA disbursements only applies to some programs,” January 22, 2025.

⁸ E&E News by Politico, “Legal Pitfalls Could Trouble Trump’s Executive Orders,” January 21, 2025.

⁹ India says US H1B visas benefit both countries after Trump, Musk backing, Reuters, January 3, 2025.

¹⁰ The Washington Post, “Deportation at ‘Light Speed:' How Trump’s Crackdown Could Unfold,” January 16, 2025.

¹¹ Center for American Progress, “Recent Anti-Immigrant State Laws Break New Grounds of Illegality,” July 22, 2024.

¹² Pew Research Center, “What We Know About Unauthorized Immigrants Living in the U.S.,” July 22, 2024.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.