Small and Mid-Cap Stocks in 2025: Corporate Tax Policy and M&A Environment Impact

Global equity markets have been readjusting to reflect the anticipated realities of President-elect Trump’s second presidential term. The market consensus seems that his administration will be characterized by stimulative, pro-growth fiscal policies, much like his first term in 2016.US equities, cryptocurrency, and the dollar rallied.

Mid- and small-cap indexes may continue to exhibit more pronounced effects. These equity segments tend to be more reliant on domestic revenue sources, and they consequently pay more significant portions of their taxes overall to the U.S. government. Reducing the corporate tax rate may provide greater relief for these asset classes than for large caps, whose geographic revenue sources are more diversified.

We anticipate that mid-caps and small caps would absorb more benefit from slashing the statutory rate, with nearly the entire 5% tax reduction visible in the change to their effective tax rates. This may boost earnings by 5%–6% and provide a much-needed tailwind for both asset classes. This sector has notably underperformed its large-cap peers over the last decade.

Though changes to corporate tax policy are never a foregone conclusion, we believe the joint presidential and congressional election outcomes may create additional strong catalysts for equities. The expectation of lower corporate taxes, deregulation, and leadership changes at key regulatory agencies all point an M&A environment with both increased transactions and larger deals under a Trump presidency.

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