What We Are Watching for in July

• Tax bill update. As of this writing, both the House and the Senate have passed versions of President Trump’s “One Big Beautiful Bill” (OBBB). The House will take up the Senate bill shortly and it is expected to be signed into law over the July 4 weekend
• Tariff updates. Technically, the very high reciprocal tariffs originally announced on April 2, then paused for 90 days on April 9, will be reinstated on July 9. However, President Trump has suggested that the pause could be further extended. We believe that if enacted as initially announced, GDP would be reduced by between 0.5% and 2.0%, and inflation would increase by between 1% and 2%. Estimates for 2025 GDP have already declined by about 0.7%, so economists are assuming that at least some portion of the tariffs will stick. The average tariff in 2024 was 2.5%, so an increase even to the minimum of 10% across the board would be material
• Labor market update. We expect the labor market may continue to soften as we get deeper into 2025. In 2024, average new monthly jobs created were 174,000, while in the first 5 months of 2025, average new monthly jobs created have been just 124,000. About 260,000 federal employees have exited or will exit the labor market in 2025, compared to a typical number of about 115,000. (75,000 of these were federal employees who opted to take early retirement; those employees will exit the labor force in the fourth quarter). Depending upon whether private employers take up the slack, net new jobs could be softer as a result of these lost government positions
• Inflation ebbs toward 2%. The most recent readings of both CPI and Core PCE showed a slight uptick from April levels, although the moving averages have trended closer to the Fed’s 2% target

• Corporate earnings. Companies will start reporting Q2 2025 earnings in the middle of July. Q2 2025 earnings are expected to grow only slightly year-over-year, at 2.6%. This is expected to accelerate to about 7% growth in each of Q3 and Q4, resulting in 2025 earnings growth of 8%, accelerating to forecast growth of 13% in 2026
• Equity market breadth? In the first quarter of the year, the S&P 500 Index handily outperformed the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla), with the performance differential exceeding 10 percentage points at the end of March. However, in the second quarter, the Magnificent 7 stocks outperformed the broader market in all three months. Will the increased breadth we observed in Q1 return to the markets?
• Will international equities continue to shine? International stocks have significantly outperformed US stocks year-to-date, with the MSCI EAFE Index’s 19.5% return well above the S&P 500 Index’s 6.2% return. EAFE stocks still trade notably cheaper than US stocks, with forward price-to-earnings multiples of 16x and 23x, respectively
• Federal Reserve meeting July 29-30. The Fed is meeting at the end of the month; currently the market is not pricing in any interest rate cuts for July but is pricing in 2-3 cuts by the end of the year. A Bloomberg analysis of Fed officials’ tones (using natural language analysis) reveals that in aggregate, Fed officials are speaking in more dovish terms in recent weeks, which could indicate a faster pace of rate cuts

Notable June Observations

• Equity markets sharply rebounded, with international stocks doing better than US stocks. US stocks appreciated by 5.8% in June, outpaced by the MSCI EAFE Index’s 12.0% and the MSCI Emerging Markets Index’s 12.2%
• Earnings revisions became more positive. After more negative revisions than positive revisions in both April and May, in June there were more positive revisions than negative revisions
• The Fed held rates steady. At its mid-June meeting, the Fed held the federal funds rate steady in a range of 4.25% to 4.5%. The committee also released its quarterly Summary of Economic Projections, in which committee members collectively reduced their growth expectations (from 1.7% GDP growth in 2025 to 1.4%) and increased their inflation expectations (from 2.7% inflation in 2025 to 3.0%)
• Israel-Iran / US-Iran. During June, military hostilities accelerated in the Middle East. Unlike the swoon seen in April under tariff uncertainty, markets did not react materially to the US action. After the US struck Iran on June 22, Treasury rates declined by approximately 0.05% and equity markets appreciated by approximately 1%
• Credit and government bonds appreciated. Interest rates on Treasuries dropped by about 0.15% at most maturities in the month, leading to a 1.5% appreciation in the Bloomberg US Aggregate Bond Index

Many clients have asked us about the impact of the tax bill. Known as the One Big Beautiful Bill (OBBB), the bill seems to be taking shape such that we expect the following:

• In general, the impact on the overall economy will be mixed, with lower taxes providing fiscal stimulus while Inflation Reduction Act rollbacks will reduce spending on renewables
• Compared to current policy, the bill will increase fiscal deficits by about $500 billion over the next 10 years. Compared to letting the 2017 Tax Cuts and Jobs Act (TCJA) expire, it adds over $3 trillion to deficits over that same time frame
• The bill will be modestly fiscally stimulative in 2025, and more fiscally stimulative in 2026
  • Some economists estimate that this will boost GDP by 0.1% in 2025 and 0.4% in 2026
• Tax cuts originally implemented in the TCJA become permanent
  • Companies can expense certain capital expenses immediately, reducing their tax liabilities, while still being able to deduct R&D expenses
  • Restoring foreign tax credits will help certain multinational companies
  • Individual tax rates remain at the lower 2017 rate
  • No taxes on tips or on overtime
  • State and Local Taxes cap (SALT) would be raised to $40k for five years
• Partial rollback of Inflation Reduction Act provisions, expected to save $500 – $600 billion over 10 years
  • This is meaningfully negative for solar and wind developers, as credits would no longer be available for projects placed in service after 2027
  • Rollback of renewable incentives will likely benefit nuclear and geothermal, and may also structurally increase power prices over the intermediate term given multi-year waitlists for new natural gas turbines
• Cuts to Medicaid, expected to reduce government outlays by $600 – $700 billion over 10 years
  • This is meaningfully negative for hospitals, although there may be a rural hospital relief fund to help rural states

There is much more detail in the nearly 1000-page bill, and changes could still be made. The bill only passed the Senate with a tiebreaking vote from Vice President J.D. Vance. Current news headlines suggest that some House Republicans, instead of simply passing the Senate version as anticipated, are indicating increased concern about the deficit and demanding additional concessions.

Some sort of bill will likely make it through Congress over the next days or weeks. The most important conclusion is that a bill that looks like the current version will both stimulate growth in the short term and increase the deficit in the long term.  All else equal, this will accelerate corporate earnings growth, which drives equity values. And it may lead to higher-for-longer Treasury rates, making many fixed income investments somewhat less attractive as rates rise. Some industries, like hospitals and renewable energy developers, look to be hurt, while others, like those with material foreign operations able to claim foreign tax credits and heavy industrials with high capital expenditures, look to be helped. Power prices may very well increase with curtailed energy supply growth. All-in, the provisions in this bill would likely be modestly positive for US GDP and corporate profits over the medium term while adding to the deficit over the long term.

Disclosures