A 2025 Political Lesson to Take to 2026

Editors’ Note: MarketMinder is politically agnostic. We prefer no party nor any politician and assess developments for their economic and market implications only.

Whenever there is a political change or big policy shift, you can rest assured a flood of commentary will follow. Often, we find it hypes buying the perceived “winners” of said change—presuming the policy’s intended effects will surely supercharge the obvious firms set to benefit. That can happen. But oftentimes, it doesn’t—and the very reverse occurs. Either the policy never plays out as hyped—or the excitement among investors just proves excessive. We call this twist the perverse inverse—and 2025 has quite a few examples.

As we have written many times, no political party or ideology is inherently superior for markets. However, sentiment can influence returns, especially in election and inaugural years. In America, we have observed a majority of investors view the Republican party as “pro-business,” so when a GOP candidate wins the presidency, excitement for potential “business friendly” policies often buoys stocks. Yet returns usually moderate in the inaugural year once the Republican president enters office as reality doesn’t turn out as rosy as hoped. This can apply at a broad market level or in specific categories or asset classes. So for all those who expected America First policy to drive US leadership, 2025’s non-US market leadership is a high-level look at the perverse inverse in action.

President Donald Trump entered office in January, touting many economic proposals. For instance, many presumed the Trump administration’s “crypto-friendly” agenda would be bullish for the cryptocurrency industry—and coins like bitcoin. Coins initially surged on optimism, with many sure more gains would follow. The government has passed some legislation (e.g., the GENIUS Act), but reality hasn’t met expectations—and the flagship crypto, bitcoin, has given up its gains and is in the red year to date.

It was a similar story with fossil fuel-related Energy companies. Many presume what with the shift from Biden-era renewable energy subsidies to Trump championing the oil industry, global Energy stocks (which are mostly fossil-fuel related) would boom. Yet Energy, up 12.9% year-to-date, has lagged broader markets.^[i] Meanwhile, renewables (as tracked by the S&P Global Clean Energy Transition Index) are up 48.5% and outperforming broader markets—despite the Trump administration’s supposed opposition to the latter.^[ii]

In hindsight, some of the hyped investment theses didn’t make much sense to begin with. For instance, crypto’s decentralized nature is supposed to be a feature, not a bug. Why would additional regulations be a positive for an asset whose appeal is being outside the government’s jurisdiction? Yes, it may trigger more demand for coins. But it can equally trigger more supply and derivatives. On permitting more oil drilling: Why would that be bullish for Energy stocks considering the global supply glut? Yet the initial excitement for the supposed political support often overlooks this logic.

The perverse inverse isn’t just an American phenomenon. We have seen it creep up elsewhere this year, namely, in Germany. Early in 2025, headlines cheered the spending plans of new Chancellor Friedrich Merz, arguing plans for much higher public investment would turbocharge Germany’s stagnant GDP. At the time we had doubts about that projection, as public spending’s positive effects on economic growth aren’t a given. It takes time for that promised spending to become reality (if it does at all)—which has played out in Germany. Though Merz took office in early May, lawmakers didn’t approve the government’s budget until mid-September. Already, the Bundestag is bickering over the 2026 budget and future spending plans, with opposition lawmakers questioning whether enough money will reach citizens directly.^[iii]

Many experts, from private-sector economists to Germany’s central bank, have already downwardly revised expectations for government spending’s GDP boost. Per the Bundesbank’s latest forecast, while there are some “initial signs of an increase in government orders,” any meaningful benefits won’t show up until late 2026.^[iv] Moreover, the central bank predicts government spending “will have only a limited impact on the potential output of the German economy,” and absent structural reforms, potential output will grow by just 0.4% per year over the foreseeable future.^[v] Long-term forecasts aren’t prescient and “potential GDP” is a meaningless construct, but it is telling how quickly expectations have cooled from early in the year.

Now, we have long said German stocks didn’t need this “help.” Despite wearing the moniker of “the sick man of Europe,” Germany has mostly been an economic “meh.” After 2022’s recession and bear market, stocks began recovering in late-September 2022, recognizing a years-long, deep economic downturn wasn’t likely. German stocks have continued their climb this year, up 35.8%—in line with the eurozone’s 39.6% and well ahead of global stocks’ 21.9%—even though most of that promised spending has yet to materialize.^[vi] If a bull market and expansion could run on for over three years without any government assistance, we don’t see why Merz’s spending package would be necessary now for the economy or markets.

In general, we recommend questioning rote assumptions about how a given policy or politician will influence a category of stocks. Very often, they do something perversely inverse to what you expected.