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

BCA Research warns that President Trump's renewed tariffs through 2027 could trigger broader retaliation—particularly from China—and strengthen Democrats' prospects of winning both chambers of Congress in the 2026 midterms. The firm cites Trump's net -27% approval rating on economic management and just 17% tariff support among independent voters, while elevated energy prices tied to unresolved Iran and Ukraine conflicts add political and market pressure. BCA expects election-related volatility but does not see it derailing the bull market, arguing that a Democratic sweep would not prevent a year-end equity rally.

Analysis

The investable issue is not the first-order tariff headline but a widening dispersion between domestically sourced, regulated-demand businesses and global cyclicals with fragmented supply chains. Homebuilders with predominantly U.S. labor/land exposure (DHI, LEN, NVR) could outperform if a weaker policy backdrop pushes mortgage rates lower, although tariffs on lumber, appliances and fixtures cap gross-margin upside. Green-capex beneficiaries (FSLR, NEE, PWR) are less straightforward: domestic-content protection helps selected manufacturers, but higher imported equipment costs and permitting uncertainty can delay project starts.

For Citi (C), the direct earnings sensitivity is limited relative to industrial importers; the more relevant channel is trade-driven volatility, client hedging and capital-markets activity versus rising credit losses among trade-exposed middle-market borrowers. That mix is modestly positive for Markets revenue over days to quarters but negative for credit costs if retaliation weakens global volumes. C's international footprint makes it a cleaner expression of cross-border activity than U.S.-centric banks, so sustained global retaliation—not merely bilateral rhetoric—would pressure its valuation discount from both lower fee expectations and higher required capital buffers.

The consensus may be too focused on an eventual policy reversal after market stress. A repeated "escalate then retreat" pattern can still reduce corporate inventory efficiency, raise working-capital needs and defer capex, creating an earnings drag before tariff rates reach economically prohibitive levels. Over the next 1-3 months, watch import-price data, corporate guidance on sourcing and China-linked retaliatory actions; over 6-18 months, the key differentiator is whether companies can pass through costs without volume erosion. The thesis fails if core goods inflation remains contained while industrial order books and global PMIs reaccelerate, indicating supply-chain adaptation is offsetting the policy shock.

Key Decisions for Investors

• Maintain a 1-3 month defensive relative-value basket: long XLP versus short XLI. Consumer staples' pricing power and lower trade sensitivity should outperform if input-cost uncertainty suppresses industrial orders; reassess if U.S. manufacturing PMI moves sustainably above 52 or XLP/XLI underperforms by 5%.
• Use DHI or LEN selectively rather than a broad homebuilder basket: accumulate only after confirming that mortgage-rate relief offsets materials inflation. Target a 6-12 month holding; exit if quarterly gross-margin guidance falls more than 150 bps from current expectations, which would signal tariff pass-through is overwhelming demand support.
• For C, avoid a directional trade solely on this development. Set an alert to reduce exposure or hedge with KRE puts if cross-border credit provisions rise materially or management cites trade-related client stress; conversely, a Markets-revenue beat without deterioration in net charge-offs would support owning C through the next earnings cycle.
• Position for dispersion in clean energy: prefer FSLR over a broad solar ETF such as TAN on a 6-18 month horizon, but size modestly. Domestic manufacturing advantages can expand if import barriers persist; invalidate on material project-cancellation commentary, a reduction in contracted backlog, or evidence that module-cost inflation prevents utility-scale project financing.