A Tale of Two Macro Narratives
What happened last week?
The S&P 500, Dow and Nasdaq gained 1.88%, 1.60% and 2.01%. On May 22, the House passed its tax bill by a narrow 215-214 margin, sending the measure to the Senate.
The Congressional Budget Office (CBO) estimated the bill would increase the deficit by $2.3 trillion over 10 years before some last-minute amendments were made. Citi Research initially estimated the cost at $2.7 trillion with $1.9 trillion of that offset by new tariff revenues.
On May 28, the Court of International Trade blocked President Trump’s global tariffs but a federal appeals court provided a temporary reprieve the next day, making what comes next hard to predict.
3 Things to Know
Court Ruling Implications for Trump’s Tariffs
We continue to believe widespread use of tariffs will be a feature of US policy for the next 3.5 years and economic impacts will remain difficult to judge.
Recent "soft data" surveys indicate a slight rebound in business and consumer sentiment as tariffs are rolled out with somewhat less intensity. Meanwhile, we view the resiliency in real economic activity data as reflective of a pull-forward in demand ahead of tariffs.
While we ultimately think businesses and consumers will still need to share the burden of higher tariffs, benign current conditions and still-elevated inflation concerns support an on-hold Fed for now. Meanwhile, we expect monetary policy divergence over the balance of 2025 as other global central banks have more freedom to ease.
What’s Next for One Big Beautiful Bill?
While most estimates of the House-passed bill suggest that the deficit-to-GDP ratio will remain unchanged at ~6.4% after 10 years, we view this legislative effort as confirmation that neither major US party has the appetite to fix structural debt issues.
As it stands, the bill will likely have two primary effects: 1) it will be marginally stimulative for the economy, offsetting some of the tariff pain through domestic investment incentives, and 2) it will increase the need for Treasury issuance, putting further upward pressure on interest rates.
In conjunction with the Moody's downgrade and rising global yields, potential for fiscal angst in the coming weeks keeps us underweight duration within our fixed income allocation.
That said, we are actively evaluating at what higher levels in rates we can comfortably add back to duration as both an investment and as a hedge to equity risk.
Durability of Artificial Intelligence (AI)
Fears over Chinese AI upstarts and US export restrictions drove a selloff in AI infrastructure stocks earlier this year.
Results from earnings season confirmed the durability of AI-enabler earnings and helped prices rebound. We believe the sheer scale of global data center capex should continue to support economies and equity risk over the medium term.
During Q1 earnings season, the big four hyperscalers reiterated their investment plans. Investments from Gulf states and the US Stargate program could add to the mix. We believe AI adoption is likely to speed up as firms seek out ways to improve their efficiency.
See our weekly CIO Strategy Bulletin for more details