As the United States and China reached an agreement to significantly reduce tariffs this week, the immediate threat of a trade war has lessened. But Wall Street has now turned its attention to a different issue: President Donald Trump’s tax agenda.
“Lawmakers this week are debating Trump’s tax agenda, which includes extending the 2017 Tax Cuts and Jobs Act and adding potential tax cuts on tips, overtime pay and Social Security,”. That “big, beautiful bill” could carry significant consequences for both the economy and the financial markets.
Consumer Boost or Deficit Risk?
According to the article, a lower tax burden “could mean more money for consumers, the engine of the economy, to splash out at stores, in addition to providing a boost to Wall Street.” also notes that the plan could “increase the deficit, and investors might demand higher interest rates to hold US debt.”
Alan Auerbach, a professor of economics at UC Berkeley,, “I think there may still be some belief in markets that there’s going to be large spending cuts, and I think when they find out there really aren’t, that might have some impact.”
Concerns around the national debt are also rising. “The ratio of federal debt to gross domestic product…was 123% in 2024, up from 104% in 2017,” the article cited from the Treasury Department. “A higher debt-to-GDP ratio signals the government might have ‘greater difficulty in repaying its debt.’”
Budget Constraints Loom Large
Auerbach added, “We’re now talking about deficits and a national debt-to-GDP ratio that are really going to be unprecedented, except for recent recessionary times.”
And while Trump is committed to pushing forward with tax cuts, Auerbach emphasized that “there just aren’t that many places in the federal budget to cut spending.”
All Eyes on Bonds
Sam Stovall, chief investment strategist at CFRA Research, “I think we have to watch closely the bond market, because it will give us a signal as to whether it dislikes whatever Trump does with taxes.”
Recent market activity reflects this sensitivity. “The yield on the 10-year US Treasury note rose about 50 basis points the week ending April 11,” according to JPMorgan Chase analysts — “the largest weekly increase since 2001.”
Traditionally viewed as a safe investment, “US Treasuries have typically been considered a safe haven… But the ongoing worries about the deficit could keep Treasuries volatile,” the analysts warned.
Warnings on Unsustainable Debt Path
The Committee for a Responsible Federal Budget cautioned in a March report that Trump’s proposed tax measures would likely increase the national debt. The report stated, “They (lawmakers) should not add further to the debt by enacting or extending tax cuts and spending without offsets. Doing so could spark a debt spiral and impose significant costs on current and future generations.”
Chip Hughey, managing director for fixed income at Truist Advisory Services, “It is still too early to tell what the ultimate impact the final tax bill will have on the US Treasury market.”
Legislative Uncertainty Remains
Republicans still face challenges finalizing the legislation. “Not all the proposed changes are likely to make it in,” said Auerbach.
As Capitol Hill shifts focus to tax policy, “the worries about tariffs haven’t entirely gone away, either,” .
Trade Uncertainty Still Lingers
“Tariff rates still remain substantially higher than before Trump took office,” said Tom Hainlin, national investment strategist at US Bank Wealth Management Group. He added that more trade agreements might be on the horizon, but “the frameworks of the deals announced so far still need to be fleshed out.”
Hainlin pointed out, “I think perhaps going into the year, there was a hope that there would be more of a clearly defined sequence, and not this sort of parallel processing of all of these initiatives at once.”
The path for the US economy remains particularly unclear.”
David Doyle, head of economics at Macquarie, stated, “Even with the trade deal with China and suspension of reciprocal tariffs against other trade partners, tariffs remain a substantial headwind for the US economy.” He added, “While a positive development, the de-escalation does not mean that everything is ‘all clear’ on the trade war front.
