To tariff or not to tariff, that is the question?
This was the theme for 2Q25. Do tariffs matter? Yes and no. We will discuss our thoughts on tariffs and what to expect in the second half of 2025 in this report.
*We are at record highs at the end of 2Q25 in the US equity markets. Not only that, PB FAM Private Wealth investment performance substantially outperformed the benchmarks for most clients due to proactive asset allocation decisions and stock selection. Brian Brenneman, Director of Portfolio Strategy, and the team are readily available to discuss your portfolio at your convenience. *
Tariffs led to the biggest roller coaster ride we have experienced since the start of COVID five years ago. Markets reacted to uncertainty and we were within a few market hours from declaring the first bear market in five years - all caused by the “Liberation Day” announcement on April 2nd. This was a white-knuckle moment for professional money management. This is where PB FAM Private Wealth shined. We trimmed equities at the very beginning of the year expecting a correction and waited for the worse to transpire before adding to equities. A review of our previous briefs provides a perspective of our methodology and how we arrived at our strategic decision making.
So why do tariffs continue to get headlines? Tariffs matter because their application on imports can act as a tax on US consumers, leading to a rise in inflation. Recent inflation reports are still declining so that has not happened yet. President Trump continues to use tariffs as a hardline negotiating chip to get something from trade partners (ex: reduction in export tariffs). He is also pressing foreign domiciled companies to produce more in the US - which will not happen overnight. If he is successful, we will experience a building tail wind for many years to come. Finally, he views tariffs as additional income for the federal government. A recent good news report showed that June 2025, the government finally had a surplus of cash flow for a month (not a deficit) and tariffs were cited as one of the reasons. This has not happened since June 2017. One final tariff thought; tariffs can easily be skirted through false labels, routing through lower tariff countries. This is part of the reason why when new tariffs are announced, the markets yawn before continuing to move upward. We watch new tariff news closely, but the unknowns are more known today and the Liberation Day scare is now behind us.
We now have our first substantial piece of legislation out of DC under the Trump 2.0 administration: the One Big Beautiful Bill Act (“OBBB”). Is it big? Yes. Is it beautiful? That is debatable. Additional action has been proposed for the back half of 2025, but the OBBB is likely the signature legislation for the term.
Rather than pontificating on the 900+ page bill, we would prefer to have one-on-one conversations with our clients on the implications of your personal situation. Our consensus on the tax impact for most clients is “status quo” – with minor caveats. Please feel free to reach out to discuss how the tax provisions may apply to your short-term and long-term tax position. We have provided a few summary items at the end of this brief.
We anticipate markets will continue to climb higher in the second half of 2025. Our ambitious expectation that the markets would be back at record highs by July 4th was achieved. Our S&P 500 target for 2025 remains 6,600 which we declared in 2024. Our 2026 S&P 500 target is 7,300.
Why do we expect the markets to continue this climb higher:
1. Earnings: We expect a solid earnings season in July/August since very few companies pre-announced to the downside and businesses are lean and getting leaner.
2. Fed Rate Cuts: We still expect a full point of cuts between now and the end of 2026 to bring the Fed Funds rate down to the Fed's moving target of neutral in the 3.0-3.5% range.
3. Expansion of Artificial Intelligence (AI): AI is in early innings of implementation. We are scratching the surface on how it will be implemented into daily life and business activity. As a result, this remains a niche we continue to strongly favor – as evidenced by the continued strength of stocks like Nvidia (NVDA), Broadcom (AVGO), etc.
4. Deregulation: This will lead to businesses having less red tape and the ability to grow faster. On the financial side, banks will be empowered to lend more to fuel the capital expansions.
5. Executive Action: President Trump will do whatever it takes to look good over the next year. The 2026 midterm election will loom large from this point on. In midterm elections since 1960, the party that holds the presidency has lost seats in the House all but two times (1998 and 2002). If the Republicans lose control, President Trump will be dealing with impeachment hearings again for his final two years. He recognizes that the economy and markets need to be stronger than ever to earn the votes.
What can go wrong?
The unknowns are always what drives markets lower (normally these are buying opportunities). Thinking of the past 30 years and what has caused recessions; pandemic, out of control inflation, terror attacks, financial meltdown, and yet to be determined. We stand watch over financial data/news to react as timely as we can if necessary.
Summary of the One Big Beautiful Bill Act
As we predicted and discussed long before November 2024, the extension of the Tax Cuts and Jobs Act of 2017 (“TCJA”) was inevitable. This frames our opinion that the tax portion of the OBBB is largely “status quo” for individuals. The larger question rested on the additional benefits that may be added by the 2025 signature legislation. Moving forward, the OBBB is likely to provide short-term tax benefits and stimulate growth while adding to long-term concerns and fueling political talking points. As a result, we feel that the OBBB will serve as a political football for the 2026 and 2028 election cycles – much like the Affordable Care Act of 2010 and Inflation Reduction Act of 2022. Accordingly, our focus is to implement opportunities for clients over the next four years as we anticipate some beneficial tax provisions will fall if the political winds change beyond 2029 and the fight looms for the 2032 showdown.
“Permanent” Provisions for Individuals
The following provisions were included in the TCJA will become a “permanent” part of the tax code – with minor adjustments. We emphasize permanent in quotations because in Washington, nothing is immune from the whims of political change.
· TheIncome Tax Brackets: as originally defined by the 2017 TCJA, the top rate is 37% and the bottom rate is 10%. There are no meaningful changes in the designated seven brackets.
· The Mortgage Interest Deduction: remains at its current limit of $750,000 in mortgage debt ($375,000 for single filers). It had been reduced from a threshold of $1 million of mortgage debt in 2017.
· The SALT Deduction: previously capped at $10,000 for all filers, now increases to $40,000 and then will revert to $10,000 in 2030. The higher SALT cap begins to phase out for incomes above $500,000 ($250,000 in the case of a married individual filing separately). After 2030, the $10,000 SALT deduction would be applicable to all filers regardless of income and would become permanent. If your Adjusted Gross Income (AGI) falls between $500,000 to $600,000, additional tax analysis may be necessary to avoid a “tax torpedo” due to a presumed unintended consequence of the SALT phase out structure.
· The Standard Deduction: which doubled in 2017, is made permanent and increased to $15,750 for single filers and $31,500 for joint filers. These amounts would be indexed for inflation after 2025.
· The Lifetime Gift and Estate Tax Exclusions: which have more than doubled since 2017, increases to $15 million for single filers from $13.99 million and to $30 million from $27.98 million for married couples. The exclusions are indexed for inflation.
· The Child Tax Credit (CTC): which the TCJA doubled in 2017 from $1,000, is made permanent and increases to $2,200 per child starting in tax year 2025.
“Permanent” Provisions for Businesses
· Permanent Tax Cuts for Corporations: Extends and enhances the tax cuts from the 2017TCJA, providing businesses with greater tax clarity and savings for the foreseeable future.
· Small Business Deduction: The 20%pass-through business deduction, known as theQBI deduction,is made permanent.
· Section 179 Expensing: The Section 179 expensing cap is increased, allowing businesses to deduct more expenses for equipment and other assets in the first year.A business can now expense up to $2.5 million and the Act increases the phase out limitation to $4.0 million. These amounts will be adjusted annually for inflation.
· Section 199(a) Bonus Depreciation: The bill reinstates and makes permanent 100% bonus depreciation, enabling businesses to immediately deduct the cost of certain investments.The allowance is increased to 100% for property acquired after January 19, 2025. This is particularly beneficial to owners of commercial and rental real estate.
·Domestic Manufacturing and R&D Incentives: The bill encourages domestic manufacturing by allowing companies to deduct the cost of new manufacturing plants and equipment.Domestic research and development costs can be immediately deducted, and there are options for accelerating deductions on past R&D expenses.
·Qualified Opportunity Zones (QOZs): The QOZ program is permanently renewed with modified eligibility and reporting requirements, potentially encouraging investment in underserved areas.
Provisions Scheduled to Sunset in 2028
In addition to the permanent provisions, the OBBB includes numerous temporary deductions and credits good only for tax years 2025 through 2028, including:
· No Tax on Tips or Overtime: the new law caps deductions on tipped income of up to $25,000 and overtime income of $12,500 ($25,000 for joint filers). The deduction would begin to phase out for single filers with income over $150,000 and $300,000 for joint filers.
· Added Senior Tax Deduction: individuals who are age 65 and older will get an additional $6,000 deduction that begins to phase out at incomes of $75,000 for single filers and $150,000 for joint filers. Note: The enhanced deduction would be in addition to the $2,000 single filers and $3,200 married filers are currently able to deduct if they are 65 or older. This is in place of “no tax on Social Security”.
· Deductible Car Loan Interest.The new law allows for a deduction of up to $10,000 of loan interest for purchased vehicles whose final assembly took place in the US. The deduction would apply to single taxpayers with modified adjusted gross income of $100,000 or less ($200,000 or less for married filing joint).
Additional Provisions of Note:
· “Trump Account” for Children.The legislation provides for a savings account called the Trump account - fundable up to $5,000 a year, treated similarly to a non-deductible traditional IRA contribution for parents or other individuals. Contributions can be made by parents, relatives, or any other “taxable entity,” according to the legislation, until age 18, at which point the account would effectively convert to a traditional IRA. Further, parents of newborns born between January 1, 2025, and December 31, 2028, would also qualify for $1,000 in federal seed money to start the account.
· Expanded Use of HSAs and 529 Education Accounts.The legislation expands the types of health plans and participants eligible to use an HSA, allows payments of $150 a month ($300 for a family) for direct primary care (concierge medicine) arrangements, and makes permanent an extension for telehealth arrangements. The Act also broadens the use of 529 funds to include expenses such as testing fees, tutoring outside the home, and educational therapies for students with disabilities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
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