Soaring Stocks Reach New Heights Due to Generous Bill and Strong Employment Growth
In a dynamic global economic landscape, the United States finds itself navigating a complex web of trade agreements, tariff policies, and fiscal measures.
After intensive talks in London, a truce has been reached in US-China trade relations. The US will maintain tariffs on Chinese goods at a high level of 55%, while China has agreed to supply full magnets and necessary rare earths upfront. This consensus, though, signals a stabilization after a period of escalating tariff tensions. However, the US continues to impose elevated tariffs not only on China but also on other trading partners, with some tariffs delayed or scheduled for adjustment or removal over the coming months.
The recently signed One Beautiful Big Bill Act (OBBBA) is expected to significantly impact the US economic outlook. According to the Congressional Budget Office, OBBBA will increase the federal budget deficit by roughly 0.8% of GDP in fiscal year 2026 and 0.4% in 20227. While increased tariff revenues are expected to offset much of this fiscal cost, keeping the deficit near current levels, the overall policy framework is expected to push the US into a debt spiral. This fiscal trajectory will squeeze credit availability for faster-growing emerging economies and limit global monetary authorities' ability to manage inflation, a concern that the US policies tend to export internationally through tax giveaways and military spending.
The combination of the OBBBA-driven debt spiral and continued tariffs exerts considerable shocks on the global economy, affecting both growth and inflation worldwide. Rising US Treasury yields may force the US government to rely more on short-term debt issuance at higher servicing costs, potentially forcing the Federal Reserve to return to quantitative easing measures, which could undermine inflation control efforts. This dynamic is expected to exert additional pressure on the currencies and economies of US trading partners, complicating the global economic environment.
In employment news, the US economy added 147,000 nonfarm jobs in the latest report, above expectations, and the unemployment rate ticked down to 4.1%. Wage growth, however, was below expectations at 3.7% year-over-year, down from 3.8% last month. The average workweek hours were lower at 34.2, just above the five-year low of 34.1 in January.
The S&P 500 reached all-time highs due to better-than-expected job growth and the passage of the OBBBA. Since stocks bottomed, economically sensitive cyclical stocks have outperformed less economically impacted defensives, reflecting optimism about future corporate earnings as economic downside risks have receded.
President Trump's July 9 tariff deadline should be the focus, as the tariff levels of many large trading partners remain unsettled. The near-term economic outlook for the US and its trade partners appears complex and challenging, requiring careful navigation through this intricate landscape.
In the context of the complex global economic landscape, the passing of the One Beautiful Big Bill Act (OBBBA) could potentially influence finance and investing, as it is projected to increase the federal budget deficit and push the US into a debt spiral. Concurrently, President Trump's pending decision on tariffs on July 9 could exert substantial shocks on US and international businesses, especially given the continued tariff disputes with major trading partners. The ongoing trade tensions, coupled with the fiscal policy framework, may pose challenges for job growth and the monthly jobs report, as well as for the Fed's monetary policies such as interest rate cuts.
