The Trump Administration aggressively pursues its agenda…..
The quarter began with a bang as the incoming Administration rolled out a new U.S tariff structure on April 2nd its so-called “Liberation Day.” Given the unexpected magnitude of the planned tax, the stock market quickly cratered. By April 9, the President instituted a 90-day pause on a large portion of the new tariffs to allow trading partners more time to negotiate.
In recent days, the Administration again extended the tariff deadline by almost a month. The deadline was extended due to its very limited success in negotiating new trade agreements with other countries. To date, the tariff rollout has only brought forth two tentative agreements – very different from the ninety deals within 90 days that were promised. Contrary to comments from the White House, these taxes on imports are actually paid directly by the buyer rather than by the products’ seller. With the average tariff on imported goods having been raised from ~3% in 2024 to more than 15% currently, purchasers of imported goods are struggling to address these new and unanticipated expenses.
The other major initiative of the new Administration was the approval of a large new tax cut, a so-called “One Big Beautiful Bill,” (OBBB). Proponents of the new law believe that the tax cut will further stimulate economic growth – thereby paying for much of the tax cut’s cost. The argument’s flaw is that the vast bulk of the bill’s cost is from the continuation of the 2017 tax cut implemented under the first Trump Administration rather than new economically stimulative tax cuts.
Critics of the OBBB point to the massive increase in federal deficits the law is projected to add to the national debt. Most estimates place the law’s cost over the next 10 years at over $3.3 trillion, or $4.0 trillion when interest costs are factored in. Of sharp concern is that this large tax cut was implemented even though now, during an economic expansion, the US is running a fiscal deficit that equaled ~7% of GDP last year – a fiscal hole not previously seen outside of war or a severe economic downturn. Should Federal deficits continue at their current pace, forecasts do not paint a pretty picture.
Barring changes in either spending or tax levels, the U.S.’s net debt to GDP is anticipated to be more than 120% by the early 2030s up from today’s ratio of ~100%. To put this in perspective, the U.S. net debt was only 79% of GDP in 2019. We believe that the recent tax cut was ill advised and that within the next 7-8 years, the Federal government will be forced to sharply modify its fiscal budget.
Faced with the tariff-driven trade uncertainty, political pressure on the Fed, and expanding fiscal deficit, the dollar this year has now weakened by almost 11% against global currencies. While this decline will help stimulate U.S. sales overseas and juice corporations’ foreign profits, this move is a sign that foreign investors have started to question the unparalleled reputation of U.S. Treasuries as the global safe haven. In 2025, helping drive the dollar’s decline has been the appreciable net outflows of capital from the U.S. this year – a relatively rare occasion that should give policymakers a cause to reflect.
Notwithstanding the above, year-to-date, the economy has shown surprising resilience in the face of the newly implemented tariffs. Whether this strength can continue is yet to be seen. Cracks have appeared, however, as the just released CPI data showed an uptick in annual inflation to 2.7% last month. Between the current earnings season now under way, the ongoing tariff negotiations, and additional economic data, the economic picture remains very uncertain.
While the markets’ initial April plunge appears quickly forgotten…..
The second quarter was a volatile one which began with a steep market sell-off following the unexpectedly severe tariffs announced on Liberation Day. Following the tariff announcement, most U.S. stock indices quickly saw losses of more than 10%. A week later, and as a direct result of the steep market plunge, the Administration walked back both the severity and timing of its new tariffs. On the back of this policy shift, markets largely recovered their April losses by early May. From there, Wall Street continued to rally with many indices setting new highs by quarter’s end.
So far, the recent stock rally has seen broad participation across all sectors, a positive sign for general market health. Overall gains have exceeded 6%, however, the bulk of this year’s returns have come from a small group of dominant tech names, underscoring the lack of true breadth to the rally.
To put the recent Wall Street activity in perspective, and after leading international markets for more than 20 years, U.S. markets sharply lagged foreign markets appreciably in the year’s first half. Non-U.S. stocks provided a return of almost 17% in the year’s first half – sharply higher than the U.S.’s ~6.5% return. Almost half of the dollar denominated overseas returns were driven by the sharp decline in the dollar during the quarter.
On the home front, the Administration continues to aggressively attack Fed Chair Powell and the Fed’s rate setting committee over their continued intransigence in holding the U.S.’s overnight lending rate unchanged. Currently, markets are expecting no action by the committee from its July meeting although traders are still pricing in 1-2 rate cuts before year’s end. The biggest obstacles to rate cuts has been the Fed’s desire to clearly understand the inflationary impact of rising tariffs – a task made almost impossible by the everchanging tariff structure. If the Administration continues to push back the timing of its tariff deadlines, expect the Fed to be more cautious in enacting additional rate cuts, barring a substantial deterioration in the economy.
Due to the Fed’s steadfast refusal to aggressively cut interest rates, the president has repeatedly and loudly denounced the central bank and Chair Powell in particular. The idea of prematurely naming the next Fed chair has been repeatedly raised, as identifying a successor so early would render Powell a lame duck – precisely what the Administration would want. The appreciable downside risk of making Chair Powell a lame duck is that the move would create even greater interest rate uncertainty and thereby increase market volatility.
As we now are entering the heart of second quarter earnings, recent data from FactSet showed analysts are expecting 5% earnings growth for the S&P 500. Should this forecast be realized, it will mark the slowest pace of profit growth since the fourth quarter of 2023. The biggest issue facing many corporations is how to navigate the unexpected new costs they are carrying from the latest tariff rules. Broadly, tariffs have increased from ~3 to more than 20% – quite a shock to many businesses and business models.
As we look forward, the market faces a sharp challenge as valuations appear stretched. Using a historical market price measurement, the CAPE ratio, the broader market is currently priced at over two times its historic level. Whether continued corporate earnings growth or lower interest rates are sufficient to sustain additional advance will have to be seen. It should be kept in mind that even though the market appears richly valued, strong market spirits can carry the markets higher for longer than would be expected. In the near term, the evolving tariff structure, inflation readings, and Fed actions, or inaction, will be key market drivers. An improved picture on any of these three fronts could provide fodder for the market spirits to sustain Wall Street’s rise.
Until then, we hope that this letter finds you well and relatively cool in this sweltering summer heat. As always, do not hesitate to contact us if there is any matter that we may be of assistance with.
