Navigating 2025: The Evolution of US Policy and the Resurgence of Capital Markets

As we reach the 250-day mark of the current administration, the landscape for US policy and its subsequent impact on financial markets has entered a new phase of clarity and strategic realignment. Michael Zizis, Global Head of Fixed Income Research and Public Policy Strategy, provides an insightful analysis into how the initial volatility of 2025 has transitioned into a more stable, albeit complex, environment for investors.

The Shift from Uncertainty to Durable Policy Signals

At the beginning of the year, investors were largely preoccupied with the potential for radical shifts in trade, fiscal, immigration, and regulatory policies. While the initial framework focused on the "sequencing and severity" of these choices, the current focus has shifted toward the "durable policy signals" and how the market is actively pricing these realities.

Policy uncertainty, while still present, has moderated from the peaks observed earlier in the year. A significant contributor to this stabilization is the White House's ability to secure deals with key trading partners, effectively placing "tariff escalation on pause." While the administration retains the capacity to maneuver through legal challenges or non-compliance by partners, the transition from constant disruption to a more predictable executive-led policy environment has allowed markets to breathe.

The New Washington Consensus: Industrial Policy

Perhaps the most significant takeaway is the emergence of a "new, durable consensus in Washington." For decades, the political orthodoxy favored lowering trade barriers and minimizing government intervention in private business. However, that paradigm has been replaced by a robust embrace of "industrial policy," where the government takes a "more active role in shaping industries."

This trend is bipartisan and deeply entrenched. Whether it is the legacy of the CHIPS Act under the Biden administration or the current administration’s focus on "licensing fees on exports to China" and potential government stakes in private enterprises, the role of the state in sectors like healthcare, energy, and technology is growing. Critics now debate the application of tariffs rather than their fundamental existence, signaling a permanent shift in US economic strategy.

Drivers of Capital Markets Resurgence

Following a period where activity like "IPOs and mergers was unusually low," we are witnessing a significant pickup in capital markets activity. This resurgence is driven by three primary factors:

1. Reduced Policy Uncertainty: Corporate leaders now face a "smaller range of possible policy outcomes," which has restored the confidence necessary to execute strategic plans.
2. Strong Corporate Fundamentals: Businesses are sitting on strong balance sheets with "plenty of cash," and private investors are eager to deploy capital.
3. Technological Imperatives: The urgent need for investment in "artificial intelligence and technology upgrades" is serving as a catalyst for new deal-making.

These factors have materialized into tangible growth: "IPOs are up 68% year on year, and M&A is up 35%." While these figures reflect a rebound from a low base, the momentum suggests a sustained period of growth.

Macro-Economic Implications: Yield Curves and the Dollar

Looking ahead, the policy environment is shaping broader macroeconomic trends. Trade policy is expected to remain "restrictive," and the "fiscal policy trajectory appears locked in."

Because the Federal Reserve appears "willing to tolerate more inflation risk" to foster growth, we are observing a market dynamic characterized by "steeper yield curves and a weaker dollar." Investors should expect longer-maturity bond yields to remain "sticky," even as shorter-maturity yields decline in response to a more "dovish Fed." As we look toward 2026, the interaction between these policy-driven trends and the broader economy remains the critical focal point for strategic deliberation.