Market Awaits Tariff Updates After Latest on Trump Tax Bill
Here's where we're focusing as the "big, beautiful deal" heads toward its final steps.
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Indications are that when the stock market opens on Wednesday, it will continue the move lower we saw on Tuesday.
Rising Treasury yields and disappointments relative to market consensus expectations from retailers on Wednesday morning are weighing on the market while we wait for progress in Washington for Trump’s “big, beautiful deal.” Word is the war waged over the state-and-local-tax (SALT) deduction is nearing a final resolution with some reports indicating the deduction will be $30,000 while others have it rising to $40,000. We expect more details to come before too long as the final U.S. House vote is expected as soon as tonight if not later this week.
Given the hullabaloo over the deal, which would extend Trump’s initial tax cuts, something that has been well telegraphed, it feels like it’s not poised to be a meaningful market catalyst to the upside given the expected impact to the national debt. Our thinking is that such a catalyst will fall to the announcement of trade deals that reduce tariffs even lower and hopefully expand the addressable market for U.S. exports.
While we wait for developments on that front, we are getting ready for Thursday's Flash May PMI data and what it tells us about the speed of the economy and how likely the rolling 2.3% to 2.4% GDP forecasts served up by the Atlanta Fed and the New York Fed are. The same report also brings a fresh look at inflation pressures, and we will be keenly focused on what it says about the dynamics between input costs and output costs. If we see input costs rising and output costs not moving in tandem, that’s a signal to us that margin pressures are rising.
As you know, we’ve been concerned about such pressures stemming from tariffs, especially those on imports from China, and the impact on EPS expectations. Earlier this week, JPMorgan Chase JPM CEO Jamie Dimon shared his view that EPS growth expectations need to be lowered as the market is being too complacent when it comes to the impact of tariffs. The answer we are now looking for is to the question of how much lower do those expectations need go.
Back in January 2025 S&P 500 EPS was expected to rise 14.6% year over year. As of last Friday, the halfway mark of the current quarter, it stood at 9.0%. Implied in that new figure is a somewhat slower pace of year-over-year EPS growth for the market basked in 2H 2025 of 6.7% compared to 8.8% in 1H 2025. The fate of that 6.7% figure and whether it is revised higher or lower will hinge on the details of trade deals. Absent those developments, and as Walmart WMT pointed out, existing tariffs are still higher than they were at the start of the year, a headwind that may require more re-thinking the longer they are in place.
We’ll have more on this as we digest the Flash May PMI data on Thursday and mine company presentations for comments on tariffs, demand dynamics and margin comments for the current quarter and 2H 2025. As you saw on Tuesday, we did take some prudent action to lock in gains on some positions, and we’ll do more of the same as needed. Heeding our thematic strategies and other fundamental work, we will also continue to lean into companies poised to deliver superior EPS growth with favorable technical setups.
