Stephen M. Mills, CIMA® Partner
Chief Investment Strategist
There’s an old American saying that most of us are familiar with: “May we live in interesting times.” I believe the last twelve months fit that description. We experienced a chaotic presidential election that resulted in an unexpected landslide victory for Donald Trump and Republican control of both the House of Representatives and the Senate. We saw the announcement of the largest tariff increases on U.S. trading partners since the 1930s. On the geopolitical front, tensions escalated in the Middle East between Israel and Iran, leading to an unprecedented attack on Iran’s nuclear facilities to prevent them from developing nuclear weapons. Amid these events, the stock market, as measured by the S&P 500 Index, staged a strong rally after the election, briefly entered a bear market in early April, and then regained all its losses by the end of the second quarter—truly, “interesting” times.
As we try to look into our financial crystal ball to see what might happen with the U.S. economy and financial markets, the outlook seems more uncertain than usual. From our perspective, several developments could significantly impact economic conditions and the future of both fixed income and stock markets over the next few quarters. In particular, there are three issues we are currently focused on: tariffs, the fiscal 2025-26 U.S. budget bill officially called “The One, Big, Beautiful Bill,” and U.S. monetary policy. Let’s examine each of these in more detail.
Tariffs: On April 2, dubbed “Liberation Day, " President Trump announced “reciprocal” tariffs on over 100 countries with which the U.S. has trade deficits. These countries either impose tariffs on U.S. imported goods or have “non-tariff barriers” that discourage importation of U.S. goods.1.These tariffs were intended to offset the impact of these barriers. The reciprocal tariffs were added on top of a baseline 10% tariff. While the implementation of reciprocal tariffs for the European Union (EU) and China was paused for 90 days until July 9, the 10% tariff would remain in place. Over the July 4th holiday weekend, President Trump announced that his administration would begin sending letters to countries to inform them of new tariff rates on their exports to the U.S. He stated the new rates would go into effect on August 1. Treasury Secretary Bessent warned that tariffs could revert to “Liberation Day” levels, but he also indicated some flexibility with levies beginning August 1.2 . A similar deadline is approaching for China on August 14, after the Trump Administration issued a 90-day pause on reciprocal tariffs, which were set to take effect on May 14.
Tariffs could be the most important of the three issues affecting the economy and financial markets in the second half of 2025, as they can function like a tax increase. While exporters may absorb some or all of the tariff costs in their prices, in many cases, the tariff is passed on to the buyer of the goods. As a result, most of the tariff burden ultimately falls on businesses and consumers, similar to a domestic tax increase. This rise in the price of goods can slow spending and raise inflation.
The effects of the Trump administration's tariffs on the economy are difficult to assess at this time because the size and scope of the tariffs on major trading partners, including Mexico, Canada, the European Union, Japan, and China, remain unknown. While trade negotiations are ongoing, they could drag on until the end of the year or possibly into 2026. In the meantime, both businesses and consumers will stay in limbo and are likely to cut back on spending until there is more clarity. We believe this will have a moderate impact on the U.S. economy in the second half of the year.
“The One, Big, Beautiful Bill”: The House of Representatives approved the Senate version of the One, Big, Beautiful Bill for fiscal 2025-26, and President Trump signed it into law on July 4 after months of intense negotiations. A key part of the Republican bill was making the main provisions of the 2017 Tax Cuts and Jobs Act (TCJA) permanent. These provisions included: making the expiring tax rate and bracket changes of the TCJA permanent, along with the higher standard deduction and personal exemptions; increasing the annual state and local tax (SALT) deduction cap to $40,000, with phase outs for higher income earners; permanently increasing the estate and gift tax exemption to $15 million starting in 2026; and allowing full expensing of business equipment, machinery, and research and development costs.3
Overall, we expect the bill to have a positive influence on the U.S. economy over the next two years, due to the extension of the TCJA tax relief measures and ongoing government spending stimulus. However, we do not think the bill tackles the annual U.S. government budget deficit. From 2020 to 2024, the yearly U.S. fiscal deficit averaged $2.16 trillion.4. We expect continued yearly deficit spending at similar levels for the foreseeable future, along with increasing U.S. fiscal debt, which hit $36 trillion this year. While annual deficit spending helps boost growth, the growing debt could become a serious burden for the economy, in our view. For now, though, we believe the bill will support ongoing economic growth. Passing the bill also removes one uncertainty that investors must consider when planning their near-term investment strategies.
U.S. monetary policy: The U.S. Federal Reserve (Fed) has maintained its monetary policy status quo since cutting the federal funds rate by a total of 1% in the latter part of 2024. At the most recent Federal Open Market Committee meeting, held on June 17-18, the Committee kept the federal funds rate steady at 4.25-4.50% for the fourth consecutive time. The FOMC noted in its June 18 post-meeting statement that “economic activity has continued to expand at a solid pace.”5. The Fed also stated that “labor market conditions remain solid,” and “inflation remains somewhat elevated.” The Fed has a dual mandate of maximum employment and price stability.6. The Fed has various policy tools to manage financial conditions and fulfill its dual mandate, with adjusting the Fed funds rate being one of those tools. We believe that ongoing economic growth, coupled with inflation data running above the Fed’s 2% target, was the reason the Fed kept the federal funds rate unchanged.
We believe the Fed will keep the federal funds rate at the current level until more data shows that inflation is approaching the Fed’s 2% target. Inflation is currently closer to 3%, according to recent reports for both the Consumer Price Index (CPI) and the Producer Price Index.7. Higher tariffs could push inflation higher over the next few quarters. For this reason, we believe the Fed will stay on hold until either U.S. economic growth slows significantly or inflation moves nearer to the Fed’s goal.
In addition to these three issues, the war between Israel and Iran, which escalated in early June when Israel launched an attack on Iran’s nuclear facilities to disable Iran’s ability to develop nuclear weapons, created volatility in the financial markets. This escalation caused oil prices to jump nearly 25% and threatened to destabilize global financial markets. The U.S. entered the conflict on June 21 when President Trump authorized the military to send B-2 stealth bombers to drop “bunker-busting” bombs on Iranian underground nuclear facilities. Iran responded with a symbolic missile attack on a U.S. military base in Qatar that caused no damage or casualties. Subsequently, Iran agreed to a ceasefire with Israel. While Iran’s capability to develop a nuclear weapon was likely severely impacted by the attacks, we believe Iran will continue efforts to attack Israel and its allies. For now, there appears to be a significant de-escalation in hostilities between Israel and Iran. Oil prices have pulled back from their peaks, and global stock markets have resumed an upward trend. If peace holds, we believe this conflict may no longer have a significant impact on the global economy or financial markets.
Outlook/Strategy
While we expect U.S. economic growth to continue slowing in the near term, we do not anticipate a recession in the U.S. this year or during the first half of 2026. We have been surprised by the economy's resilience in recent years, despite a global pandemic, two major geopolitical conflicts, record-high inflation, and a significant tightening cycle by the Federal Reserve in 2022. We believe the economy will be able to withstand the impact of higher tariffs.
If U.S. economic growth slows more than expected, a key factor could be the Federal Reserve’s ability to cut interest rates to stimulate the economy. Recently, the Fed has skillfully managed its options—raising rates to address high inflation and starting to lower them last year to support economic activity. With the current Fed funds rate at 4.5%, there is still substantial room to lower rates later this year if a sharp economic slowdown occurs.
The tariff issue could impact the financial markets in the second half of the year. If trade talks break down and reciprocal tariffs are imposed on many of our trading partners, especially EU members or China, we may see weakness in the equity markets in the coming months. Conversely, if trade agreements are reached with these partners this year, equity markets could continue their upward trend.
Currently, the equity markets don’t seem worried about tariffs, as major stock market indices have been on a roll for the past few weeks. On June 30, the S&P 500 index hit a new all-time high, recording a 6% total return year-to-date. If you had gone to sleep on January 1 and woke up on June 30, you might have thought it had been a dull year for the stock market so far. But for those of us who have stayed alert, it has been quite the rollercoaster. On February 19, the S&P 500 reached an all-time high of 6147.8. However, over the next seven weeks, it dropped 20%, hitting 4910 on April 8. That is, by definition, a bear market. The very next day, the S&P 500 rallied nearly 10%, and by the end of June, it had fully recouped its losses.
Given the tariff issue and the current slowdown in economic activity, we may see a correction in the major stock market averages in the third quarter. If such a correction happens, we suggest considering it as a buying opportunity for those looking to invest in equities, depending on their investment goals.
Bottom Line
These are indeed both interesting and uncertain times given the numerous issues facing our nation. While this uncertainty currently clouds our understanding of what the future holds for investors, we remain cautiously optimistic and committed to our investment approach. Our strategy is based on three core principles: first, avoid reacting out of fear and emotion; second, exercise patience; and third, commit to a disciplined investing approach. We believe that applying these fundamentals during times of high uncertainty is crucial for achieving investment success and reaching our goals.
As always, we greatly appreciate your trust and confidence in us, and we will continue to work to keep you informed of economic and financial market developments.
Your Trinity Capital Management Team
TCM Tyler, TX Location
821 ESE Loop 323, Suite.
Tyler, Texas 75701
903-747-3960
Webite:www.tcmtx.com
Footnotes*
2 https://www.cnbc.com/2025/07/07/trump-trade-bessent-tariff-deadline.html
3 https://www.taxfoundation.org
4 https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/#us-deficit-by-year
5 https://www.federalreserve.gov/newsevents/pressreleases/monetary20250618a.htm
6 https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate
7 U.S. Bureau of Labor Statistics. https://www.bls.gov
8 Thompson One charts
* To view the footnote links, press and hold down the Ctrl key on your keyboard, hover over the link, and left-click your mouse.
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