AbstractThe uncertainty of Trump 2.0 was fully demonstrated in less than a month after his election. We believe that understanding Trump's potential policies requires clarifying his true demands while establishing two basic principles:Principle One: Abandon linear extrapolation and path dependence;Principle Two: Form a more serious bottom-line thinking.The market's perception of Trump's second term has formed increasingly divergent expectations in terms of policy implementation and specific policy impacts. Currently, the market uniformly expects that the U.S. will perform better next year, which is an aspect that requires caution. Specifically, we believe there are four major expectation gaps:Expectation Gap One: Tariffs will be larger and implemented more quickly.Expectation Gap Two: The U.S. economy will become more &#34;chaotic&#34; due to reforms, rather than better.Expectation Gap Three: Overestimating the relaxation of regulations while underestimating the determination to tighten immigration.Expectation Gap Four: Tariffs do not equate to inflation.In the current waiting period before Trump's inauguration, there is a vast imaginative space for policies; however, once implementation begins, various issues will emerge, and adverse factors may appear before prosperity. For example, Musk's reforms may be too radical, leading to an artificial recession, or there may be stagnation in AI technological advancements, or political turmoil and administrative chaos caused by Trump's nepotism.However, these expectation gaps may not be fully reflected in pricing, as U.S. stocks continue to price in a better economic outlook and greater dreams (AI + reforms); this path dependence needs to be cautioned against.Main TextThe uncertainty of Trump 2.0 was fully demonstrated in less than a month after his election, from unexpectedly high cabinet selections to the sudden announcement of tariffs on Canada and Mexico, all showcasing Trump's randomness and complexity. We believe that understanding Trump's potential policies requires clarifying his true demands while establishing two basic principles:<ol><li>Abandon linear extrapolation and path dependence;</li><li>Form a more serious bottom-line thinking.</li></ol>On this basis, the market's perception of Trump's second term has formed increasingly divergent expectation gaps in terms of policy implementation and specific policy impacts. Specifically, there is a possibility that reality may be completely different from market expectations, even entirely opposite: currently, the market uniformly expects that the U.S. will perform better next year, which is an aspect that requires caution.In the current waiting period before Trump's inauguration, there is a vast imaginative space for policies; however, once implementation begins, various issues will emerge, and these adverse factors may appear before prosperity. For example, Musk's internal reforms may be too radical, leading to recession expectations potentially being triggered early, or there may be a collapse in AI demand and corporate capital expenditures, or political turmoil within the party and chaos in the U.S. administrative system caused by Trump's nepotism.<h2>Expectation Gap One: Tariffs will be larger and implemented more quickly</h2>When discussing tariffs, it is often mentioned that &#34;Trump's tariffs are merely a means of extreme pressure, not an end,&#34; and then linear extrapolation is made based on the previous round of trade friction, believing that tariffs take months from announcement to implementation.But first, it is necessary to clarify what Trump's &#34;purpose&#34; of tariffs is. We believe that through tariff coercion, Trump's true broad demands are threefold: promote the return of manufacturing, maintain the international reserve status of the dollar, and repair the trade deficitThese goals themselves also face their own issues. The return of manufacturing has been promoted since the Obama era, and Biden's three major bills in 2022 have significantly boosted growth in manufacturing construction spending. However, so far, the output level of U.S. manufacturing and overall efficiency have not significantly improved, and competitiveness remains limited; the growth slope of data center construction related to AI has also not shown a noticeable increase.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3bf9e9a6-7221-4ff1-a862-8a985fce10ea.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3bf9e9a6-7221-4ff1-a862-8a985fce10ea.png"/>Maintaining the international reserve status of the dollar also contradicts the need to quickly narrow the trade deficits of major countries. If U.S. goods and services do not possess higher competitiveness, repairing the trade deficit will rely more on other countries actively reducing purchases, leading to a decrease in demand for the dollar.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f34b0d42-f432-4396-b4f2-a4cdfdbcdd02.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/f34b0d42-f432-4396-b4f2-a4cdfdbcdd02.png"/>At the same time, Trump also faces objective time pressure: he may only have 2 years (still controlling both houses before the midterm elections) or at most 4 years (the entire term). This means he may not be able to stay in a tariff coercion state for too long, and it is more in line with his policy layout to &#34;open fire&#34; as soon as possible to achieve his goals.Therefore, Trump's tariff policies towards different countries may have significantly different implications. Trump's latest statements have also abandoned the concept of universal tariffs, emphasizing tariff policies for key trading partners, which provides more flexibility for various transshipment trades.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/709fe83e-19b3-416d-a33c-523506ba696a.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/709fe83e-19b3-416d-a33c-523506ba696a.png"/>We believe that linearly extrapolating from the timeline of the previous round of trade friction does not have higher confidence. Even if Trump treats tariffs as a &#34;means&#34; rather than an &#34;end,&#34; he still needs to see the actual effects they bring, especially for long-term goals like the return of manufacturing, where imposing tariffs earlier aligns more with Trump's overall planning.<h2>Expectation Gap Two: The U.S. Economy Will Become More &#34;Chaotic&#34; Due to Reforms, Not Better</h2>The view that the U.S. economy will improve by 2025 is not lacking in logical support, but it is a product of linear extrapolation: the private sector has ample leverage space, and the cycles between enterprises and households continue. However, it cannot be ignored that the deficit level for the U.S. fiscal year 2024 is once again increasing, with the deficit rate still above 6%.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/47a84999-2eea-4aed-b026-3fb81b3156bd.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/47a84999-2eea-4aed-b026-3fb81b3156bd.png"/>The support of U.S. government spending for the economy is evident, especially through transfer payments for the lower-income population via social security, healthcare, and veterans' insurance, which are important means to help them cope with high inflationHowever, many actions during Trump's second term will break the norm, with no historical precedent to follow. The most notable aspect is how the efficiency department led by Musk will promote reforms in the American system. Musk has previously elaborated on the blueprint and agenda for deregulation. Although the scale of budget cuts and layoffs in federal agencies has not yet been announced, we believe his importance during Trump's second term is gradually increasing.We previously mentioned that Musk's reforms are a significant bet under Trump 2.0; however, the counter-effects are also relatively obvious: internal layoffs or changes in administrative regulations, how the private sector will absorb additional labor, and internal conflicts within government departments may lead to job vacancies, further exacerbating efficiency losses and creating problems.At the same time, Musk's budget-cutting plan may appear limited from a bottom-up perspective. In terms of scale, it is difficult to reach the &#34;two trillion&#34; dollars that Musk once mentioned, but this does not mean it is &#34;impossible&#34; to do. If Musk excessively cuts spending (in defense, healthcare, etc.) and combines this with concentrated layoffs in government departments, it could likely trigger a small artificial recession, making the U.S. economy more chaotic rather than better.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/830d6410-a570-4837-a97b-b289555c38fd.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/830d6410-a570-4837-a97b-b289555c38fd.png"/>Even successful reforms cannot avoid a period of pain, let alone the possibility that the U.S. is experiencing a failed Musk reform, leading to even more chaotic results.<h2>Expectation Gap Three: Overestimating Deregulation and Underestimating the Determination to Tighten Immigration</h2>The obstacles to implementing deregulation are relatively small, which is one of the reasons the market remains optimistic about 2025, given the current resilience of the U.S. economy. If extensive deregulation occurs in industries such as energy, finance, and artificial intelligence (along with Musk's efficiency reforms), including relaxing restrictions on traditional fossil fuel extraction, traditional energy use, and vehicle emissions requirements, the innovative vitality of the U.S. economy will be further stimulated.However, whether this stimulated animal spirit can immediately boost the real economy is questionable. From the history of 2017, we can see that the deregulation adopted after Trump's election had a significant positive impact on soft data, but after a series of deregulation executive orders were signed, the hard data related to U.S. growth did not improve.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b629179f-a898-4523-a647-e39811d0cfed.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b629179f-a898-4523-a647-e39811d0cfed.png"/>The stimulation of animal spirits also requires a supportive historical context; the election results have already proven that the current U.S. is entering a more fragmented and chaotic era.Moreover, after further deregulation in the financial sector and industries like artificial intelligence, the ability to withstand risks will be weaker, which is a double-edged sword. One cannot only focus on the higher ceilings opened up by deregulation but must also pay attention to the vulnerabilities exposed simultaneously.Corresponding to the positive impact of deregulation on the U.S. economy is the negative impact of tightening immigration policies, especially as a significant number of illegal immigrants have made notable contributions to the recovery of the U.S. economy over the past few years. While the market overestimates the former, it also relatively underestimates Trump's determination to advance tighter immigration policies<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ba36f990-e0e3-415b-8c00-0ab637e7c482.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ba36f990-e0e3-415b-8c00-0ab637e7c482.png"/>It is unreasonable to extrapolate that Trump's immigration policy has a small economic drag based on the historically low number of deportations each year, as immigrants contribute significantly to the U.S. economy. At the same time, the incoming U.S. Senate Majority Leader Chuck Schumer has clearly stated that he will advance the first bill within 30 days of Trump's inauguration, with the top priority being to secure funding for border security.Trump announced tariffs on Mexico and Canada, and the surge in illegal immigration is one of the reasons; moreover, the immigration issue in the U.S. is more like North America's own &#34;domestic affair,&#34; as the economic and cultural exchanges among the U.S., Canada, and Mexico are extremely frequent. Trump could leverage his &#34;transactional thinking&#34; as a businessman to address immigration through more &#34;means.&#34;Trump has a wealth of cards to play regarding illegal immigration, and if he intensifies efforts with a higher priority than the market expects, we believe it will not only offset the positive boost from regulatory relaxation but may also further drag down U.S. economic growth.<h2>Expectation Gap Four: Tariffs Do Not Equate to Inflation</h2>The impact of tariffs on U.S. inflation remains highly uncertain. Even when comparing to the last round of trade friction, in some industries where product prices increased, overall prices across the U.S. did not rise significantly. Furthermore, the current macroeconomic context is different in two ways:<ol><li>The profits of the three types of U.S. merchants (retailers, wholesalers, manufacturers) are at historically high levels, with large retailers having assets exceeding $50 million seeing net profits nearly double those of 2018, which can absorb some of the tariff impacts.</li></ol><img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7a31584c-0e17-4c03-96c7-8ef25625b6c5.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/7a31584c-0e17-4c03-96c7-8ef25625b6c5.png"/><ol><li>China's more globalized layout (going overseas and transshipment), combined with Trump's abandonment of universal tariffs, means that China's indirect trade with the U.S. will be less affected, in other words, the direct trade importance of tariff impacts is declining.</li></ol>At the same time, we have observed that U.S. households have begun to stockpile large durable goods to avoid potential price increases due to tariffs. From this perspective, price changes in the tradable sector may become smoother, and the one-time price jump caused by tariffs may not be significant.In other policy areas, such as tax cuts, there is no significant expectation gap. Especially considering that tax cuts are a political legacy from Trump's previous term, coinciding with the expiration of the TCJA act next year, and are relatively easy to implement since not much is required: first, extending the TCJA act from 2017 until the end of 2025, and second, continuing to reduce the corporate tax rate to 15%.Additionally, there is broad consensus within the Republican Party on this matter, whether among establishment figures or MAGA supporters, with no dissent regarding tax cut policies, which helps promote U.S. economic development. Although the priority of tax cut policies is high, the process may take a long time; however, we believe this is one of the easiest policies to implementHowever, the four main expectation gaps are not fully reflected in the current pricing of U.S. stocks. The current pricing of U.S. stocks reflects a better economic outlook during the Trump 2.0 era, even achieving greater dreams (AI + reform) under relatively good economic conditions.However, the public's perception may be exacerbated by the chaos brought about by reforms and the increased pressure on living standards due to government spending cuts, leading to a genuine &#34;atmospheric recession&#34; and forming expectations of a real, artificial minor recession. True technological advancements are not afraid of macro factors' influence; this may be the moment when the grand narrative of AI reveals its true essence.Author of this article: Song Xuetao S1110517090003, Source: Tianfeng Securities, Original Title: &#34;Expectation Gap of Trump 2.0,&#34; this article has been abridged.Risk Warning and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk

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The policy uncertainty of Trump 2.0 quickly emerged after his election, with four major differences in market expectations for his second term: the magnitude and pace of tariffs, the chaos of economic reforms, the overestimation of deregulation and underestimation of the determination to tighten immigration, and the relationship between tariffs and inflation. Although the market generally expects the U.S. economy to improve, the actual implementation of policies may bring adverse factors, and the risk of path dependence should be monitored

- The uncertainty surrounding Trump's second term is evident, with significant market expectations diverging from potential policy outcomes.  
- Key discrepancies include expectations of increased tariffs, economic chaos from reforms, underestimating immigration policy impacts, and the unclear relationship between tariffs and inflation.  
- As Trump implements policies, the anticipated benefits may be overshadowed by challenges, leading to a potential economic downturn despite optimistic market projections.

The expectation gap of Trump 2.0