The Economy
The U.S. economy in May 2025 remained in a transition period, marked by slowing growth, persistent inflation concerns, and a cautious Federal Reserve navigating new trade policies. Real GDP contracted by 0.3% annualized in Q1 2025, mainly due to a surge in imports, while the Federal Reserve maintained its federal funds rate at 4.25%-4.50%, signaling a “wait-and-see, data-driven” approach amidst rising inflation and unemployment risks. Volatile government tariff policy added to the uncertainty, with President Trump’s 10% universal tariff remaining in effect, a temporary reduction of tariffs on Chinese goods to 30% (reciprocated by China), and the elimination of the de minimis exemption for China and Hong Kong. Although a court ruling last week almost halted the “reciprocal” tariffs from President Trump’s April 2nd announcement, its implementation is currently paused pending appeal. Meanwhile, the labor market showed signs of moderation, with 177,000 nonfarm payrolls added in April and unemployment holding at 4.2%, while initial jobless claims rose to 240,000 by late May. As measured by Core PCE, inflation was 2.5% year-over-year in April, with concerns that new tariffs could lead to a reacceleration in the 3rd quarter.
Looking ahead, Wall Street economists’ consensus for the remainder of 2025 points to a slowing but still positive pace of real GDP growth, between 1.3% and 1.8% for the full year. However, many anticipate growth to approach “stall speed” by the fourth quarter. Inflation is widely predicted to reaccelerate, primarily due to the impact of tariffs, with Core PCE likely remaining in the 2.5% to 3.0% range, ending the year a little over 3%. The Federal Reserve is expected to maintain its current interest rate levels throughout 2025, closely monitoring the evolving economic landscape before beginning to lower interest rates again, starting next year. The probability of a U.S. recession in the next 12 months remains a notable risk but has held steady in the 30% to 45% range among leading economists for the last month.
The Market
U.S. equities staged a remarkable recovery in May, thanks to optimism surrounding easing tariff tensions, with the S&P 500 up 6%, posting its best May since 1990. Strong Big Tech earnings powered the market upward, as the S&P 500 Top 50 stocks rose 8%. Although the fiscal deficit, inflation concerns, and ongoing geopolitical uncertainties continue to linger, volatility declined, with the VIX volatility index closing the month below 19 for the first time since February.
Notwithstanding the strong performance in May, geopolitical risks remain the primary focus for investors, with new concerns that China may not follow through on its recent Geneva commitments, which drew renewed criticism from former President Trump last week. Markets have reacted negatively to every inflammatory tweet from the president, only to quickly recover after realizing it is just his negotiating style. While current tariff levels appear manageable, any serious escalation could present downside risk for the markets. Ongoing legal challenges, potentially reaching the Supreme Court, add uncertainty, but market dynamics continue to be driven more by earnings and economic growth than political developments.
Probably the best example is Nvidia’s strong earnings report last week, which underlined the continued strength of AI demand despite supply chain complications related to China. The AI trend appears durable and still early in its cycle. It has the potential to drive long-term productivity gains across sectors, not just within large-cap technology stocks. This broadening impact, combined with relatively low valuations and a more predictable regulatory environment, points to a favorable long-term setup.
Assuming tariffs remain around current levels—10% generally and 30% for China—the market could continue its cautious recovery. Last weekend’s tariff increases on steel and aluminum illustrate that risks have not gone away, but unless further drastic measures are introduced, the broader outlook remains stable. Despite ongoing noise around trade policy, inflation, and politics, the market’s resilience reflects confidence in the fundamentals: steady consumer spending, improving productivity, and signs of stabilizing inflation.
Wealth Planning
As the Senate returns from an extended Memorial Day holiday today, here is a brief overview of the key individual tax provisions in H.R. 1, also known as the “One Big Beautiful Bill Act.” It will be interesting to see what stays in the Senate version and what ultimately comes out of the reconciliation committee, as there will be differences between the House and Senate bills.
Here’s a breakdown of the significant changes from H.R. 1:
1. Extension of TCJA 2017 Individual Tax Provisions:
- Individual Income Tax Rates: The bill makes the lower individual income tax rates and thresholds from the TCJA 2017 permanent.
- Standard Deduction: The doubled standard deduction from the TCJA 2017 is made permanent, preventing it from reverting to a lower amount.
- Child Tax Credit (CTC): The $2,000 per child credit amount from the TCJA 2017 is made permanent. The refundable portion of the CTC has also been made permanent.
2. Modifications and New Provisions which will sunset at the end of 2028 (after the next Presidential election):
- Increased Standard Deduction (Temporary): From 2025 to 2028, the bill temporarily increases the standard deduction for single filers by $1,000 and for married couples by $2,000.
- Increased Child Tax Credit (Temporary): A temporary $500 per child boost (making the maximum credit $2,500 per child) is in effect from 2025 to 2028.
- No Tax on Tips and Overtime (Temporary): A deduction for qualified tips and overtime compensation is introduced for taxpayers earning less than $160,000 per year, effective from 2025 through 2028.
- Deduction for Car Loan Interest (Temporary): A deduction of up to $10,000 for interest paid on car loans for vehicles assembled in the US is introduced. It will be phased out for higher earners (over $100,000 for single filers) from 2025 through 2028.
- Savings Accounts for Newborns (MAGA Accounts): The bill creates new tax-advantaged savings accounts, called “Trump Accounts”, for children under 8, with contribution limits and qualified distribution rules.
H.R. 1 aims to permanently implement key TCJA 2017 individual tax provisions while adding temporary new deductions and credits, such as boosted standard deductions and child tax credits. As this bill moves through Congress, its final form is uncertain. We will continue to monitor these developments, but please don’t hesitate to contact us if you wish better to understand the potential impacts on your financial plan.