US Strategy Weekly: OBBB

Our optimism for the stock market in the second half of the year has been predicated upon the passage of the One Big Beautiful Bill (OBBB) by Congress; and in our view its signing on July 4, 2025 sets the stage for a stronger economy in coming months and quarters. The alternative would have resulted in the largest middle class tax increase in history, and it is quite possible that failure to pass the OBBB would have triggered a recession in 2026.

The positives in the OBBB are that for individuals it makes permanent most of the tax cuts and lower marginal rates in the 2017 tax bill which would have expired at the end of this year without congressional action. It also boosts the standard deduction by $750 ($1500 for couples), increases the federal child tax credit from $2000 to $2200 and creates new “Trump accounts” for children into which the government can make a $1000 contribution per child. It also includes deductions on tips, overtime and car loan interest payments as well as a temporary $6000 deduction for adults 65 and older who earn no more than $75,000 a year. Note that none of these provisions fund government-run programs (much like the 2022 Inflation Reduction Act or the Infrastructure Investment and Jobs Act) but put money directly into the hands of waiters, Uber drivers, seniors and middle-class US households. As a result, we expect it will be a direct boost in consumption and GDP.

However, business-related tax cuts could prove to have the biggest impact on the economy. The OBBB extends numerous business-related tax cuts from the 2017 bill and also permanently extends Section 168 first-year bonus depreciation deduction. Very simply, this provision allows businesses to deduct a significant amount of the cost of property in the first year it is placed into service, rather than depreciating it over several years. Eligible property includes computer systems, software, vehicles, machinery, equipment, and office furniture. Qualified improvement property (QIP), or improvements to existing nonresidential buildings, also qualify. The bill allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in tax years beginning in 2025. This does not apply to research outside of the US. In short, the OBBB inspires domestic capital investment and research and it is retroactive to January. Since the bill gives immediate tax relief to domestic corporations expanding their businesses, it should have a direct and quick impact on capex. 

Among other things, the OBBB also includes $12.52 billion in federal spending for Air Traffic Control modernization, funding for the Golden Dome missile defense system, $46 billion for construction of the US-Mexico border wall, $45 billion to expand detention capacity for immigrants whose removal is pending and $5 billion for Customs and Border Protection facilities. These provisions should be stimulative to the technology and industrial sectors while also producing good-paying jobs. 

The negative to the OBBB is that it does not go far enough, according to some, in cutting spending and the deficit. It does focus on eliminating waste, fraud, and abuse in Medicaid and blocks illegal immigrants from receiving Medicaid. However, as a businessman familiar with debt funding, we believe President Trump’s goal is to simultaneously trim the deficit while growing the economy. If the administration is successful, the deficit-to-GDP ratio will fall from the currently unsustainable level of nearly 7% of GDP to the pre-COVID level of 3% to 4% of GDP, i.e., at the rate of economic growth.

Meanwhile, the overall economy appears to be stable, although surveys show that uncertainty is negatively impacting areas of the economy. The June employment report showed an increase of 147,000 jobs in the month and positive revisions for previous months that added an additional 16,000 jobs. The rate of increase in job holders was 1.15% YOY in the establishment survey and 1.4% YOY in the household survey. Both rates are slightly below the long-term average but more importantly, indicate a stable and growing job market. Job gains were largest in state and local government and in healthcare; meanwhile, federal employment continued to decline. The unemployment rate fell from 4.2% to 4.1%, as a result of an increase in those employed and a decline in the number of unemployed in the household survey. There was no significant change in the participation rate or the employment-population ratio. See page 3.

Average hourly earnings rose 3.7% YOY in June and average weekly hours fell by 0.1 to 34.2. Average weekly earnings for private workers rose 3.4% YOY and for production and nonsupervisory workers earnings rose 3.3% YOY. Both of these gains exceeded the inflation rate of 2.4% and represented an increase in real weekly earnings. In June, the number of discouraged workers rose sharply from 352,000 to 654,000 — the highest monthly figure since December 2020. This increase corresponded with a rise in the number of individuals leaving the workforce which could be related to immigration policy or that illegals fear deportation when reporting to work. See page 4. In the long run, a tightening in the labor market could become a real inflationary factor, not tariffs.

Both ISM manufacturing and nonmanufacturing indices rose in the month of June. Manufacturing rose from 48.5 to 49.0, however this still remains below the breakeven level of 50 which defines contraction versus expansion. The nonmanufacturing index rose from 49.9 to 50.8, which was back to expansion mode after a brief dip below 50. In both indices production and business activity were higher in the month. See page 5. The worrisome factors in the ISM reports were related to prices paid which remain elevated in both indices at 69.7 in manufacturing and 67.5 in nonmanufacturing. Employment was also a concern, falling from 46.8 to 45.0 in manufacturing and from 50.7 to 47.2 in nonmanufacturing. However, note that the employment trends in both ISM indices have been decelerating for the last three years. Surveys have been significantly weaker than hard data and may not be reliable. See page 6.

The Small Business Optimism Index declined 0.2 in June to 98.6, slightly above the 51-year average of 98. Of the 10 components, four increased, four decreased, and two were unchanged. Inventory satisfaction contributed the most to the decline in the Index. The Uncertainty Index decreased by 5 points from May to 89. Thirty-six percent of all owners reported job openings they could not fill, up 2 points from May. Thirty percent had openings for skilled workers (unchanged), and 13 percent had openings for unskilled labor (unchanged for the fifth consecutive month). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and transportation industries. See page 7.

US light-vehicle sales declined for a second consecutive month in June — the first back-to-back monthly declines since mid-2023. The earlier surge in sales — the highest levels in over four years — was driven by accelerated purchases in anticipation of prospective tariffs. Seasonally adjusted annualized sales (SAAR) registered 15.3 million units, a 1.7% decline from May but a 2.3% increase from the prior year. The US auto industry faces tariff uncertainty but also elevated vehicle prices and financing costs. But note that the One Big Beautiful Bill allows for a tax deduction on Made in America auto loan interest and this should help the domestic auto market. See page 8. The technical condition of the equity market continues to be very favorable with the NYSE cumulative advance/decline line hitting a new high on July 3, 2025, daily new highs averaging 500 per day, and our 25-day up/down volume oscillator predicting a new high in the averages in the middle of May. See page 11 and 12. The only negative in the current environment is valuation with the forward PE currently at 21.1 times, well above the long-term average of 17 times. However, we expect earnings will surprise to the upside in the second half of the year and support the rally. We remain bullish.

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