There are so many factors driving markets at the moment.
Last Friday, I highlighted 8 things that were weighing on sentiment and that continues to be the case.
This week, markets got some life when the House passed a budget resolution on extending the 2017 Trump tax cut. That was a big win as they could only afford to lose 1 vote (which they did lose). The vote was briefly cancelled and then it later passed.
The market optimism didn’t last long though and much of that is AI angst and tariffs but — make no mistake — the tax cut is a huge part of how markets will perform in 2025. It’s impossible to know but I think it’s 80% priced in, though you could argue it’s much lower as the S&P 500 right back to where it was on election day.
To recap, the original bill lowered corporate tax rates to 21% from as high as 35% (though effectively they were in the mid-to-high 20% range). It also lowered all individual tax rates, boosted the child tax credit, raised the standard deduction and doubled the estate tax exemption.
All of that was good for growth but it also ballooned the deficit and it’s set to expire at the end of this year. To extend it, Congress will have to act.
I’m confident it will but exactly how that happens is harder to predict. The best scenario for the market would be higher deficit spending, despite the obvious future drawbacks and possibility of higher Treasury yields. At the moment, I think there is something of a tell in the bond market as 10-year yields have fallen 50 bps from the January highs.
To me, that signals that there will be some kind of offset in the budget. Right now, that looks like deep cuts to Medicaid and food stamps. How those things reverberate through the economy could be keeping risk assets off balance.
When I sum it up, I just think that fiscal policy at the moment is too uncertain. There are some real hawks in Congress and there is no easy path to improving the budget balance. Doge is smoke and mirrors and there is no amount of tariffs that can make real difference.
