The Economy
While second-quarter economic growth appears robust on the surface, potentially reaching nearly 4% driven by a surge in durable goods, this figure doesn’t fully capture the significant economic and political volatility experienced in the last 6 months. For instance, the first-quarter GDP saw a decline of 0.5%. When averaged, the first half of the year barely achieves 2% growth, and this is before accounting for the anticipated impact of the next round of tariffs on consumer goods. However, despite ongoing policy uncertainty and depressed consumer and business sentiment indicators, spending and investment continue to show resilience.
Turning to interest rates, the Treasury market has seen the 10-year yield soften to the 4.25%-4.30% range. This persistent inversion with the Fed Funds Rate above 4.3% continues to signal an overly restrictive monetary policy. The downward pressure on long-term rates aligns with emerging signs of moderating economic growth. Recent personal income data has cooled, and while initial jobless claims remain low, a rise in continuing claims suggests companies are retaining their current workforce but are hesitant to expand payrolls. This extended duration of unemployment points to the ongoing impact of AI-driven efficiency initiatives, as firms prioritize upskilling existing staff with new technologies over broad-based hiring.
The housing sector, as anticipated, is feeling the effects of elevated interest rates. For the third consecutive month, both the Case-Shiller and FHFA home-price indices have come in below expectations. A more subdued housing market serves as a crucial check on core inflation, reinforcing the view that the Federal Reserve has ample room to consider easing. While Chair Powell’s “wait-and-see” approach is likely to prevail, and despite potential dissenting voices, a policy shift is not anticipated at the July 30th meeting. The futures market anticipates a 25-basis point rate cut at each of the subsequent three meetings, potentially bringing the Fed Funds Rate to approximately 3.50% by early 2026.
The Markets
Shrugging off inflation concerns, trade tensions, and a war in the Middle East, U.S. equities staged a dramatic recovery in Q2, with the S&P 500® rebounding by over 20% since the tariff-related sell-off experienced in early April. Fueled by robust corporate earnings from Big Tech and recent optimism surrounding potential upcoming tax cuts, the S&P 500 reached another new all-time high, the highest close since February. A swift return of oil prices to pre-Israel-Iran conflict levels, alongside constructive progress in NATO negotiations and a de-escalation of tensions in Iran, collectively bolstered investor sentiment, reigniting a healthy appetite for market risk.
Corporations are not sitting back and waiting but are actively navigating this environment. Notably, Nike recently announced an anticipated $1 billion tariff impact, yet it still exceeded Q2 estimates. Nevertheless, a degree of skepticism persists among trading desks. The VIX volatility index, while off its peak during the Iranian escalation, remains somewhat elevated, indicating professional hedgers have yet to capitulate fully. This dynamic suggests that a “Fear of Missing Out” (FOMO) rally could potentially propel major indexes higher before encountering any material headwinds from earnings impacted by tariffs.
The current narrowness of the market rally, due to the outperformance of the largest technology stocks, has left behind some interesting market segments in its wake, such as small caps. These areas may not be direct AI plays but are particularly well-positioned to leverage AI adoption for outsized efficiency gains. On the international front, calmer energy markets are alleviating pressure on European and Japanese economies, while a modest increase in Chinese stimulus could provide meaningful support for global cyclical sectors.
Bottom Line: The convergence of declining bond yields, a cooling housing market, and a softening labor market provides the Federal Reserve with substantial justification for a pivot to lower interest rates. Until such a move materializes, upward equity market momentum could still persist, driven by short-covering, as well as ongoing improvements in productivity and margins fueled by AI.
Wealth Planning
Senate Passes BBB, But Hurdles Await in House
This morning, the Senate passed its version of the Big Beautiful Bill. The bill now goes back to the House. I will highlight two provisions that will impact you: the SALT Deduction and the Charitable Deduction.
The House and Senate Versions of the State and Local Tax deduction are similar, but have different expiration dates. The Senate bill lifts the SALT deduction cap to $40,000 starting in 2025, with the phaseout starting over $500,000 of income. This provision would expire after 2029 and revert to $10,000 deduction cap. The House version would last until 2033, after which it would revert to $10,000. Each version raises the $40,000 cap by 1% annually.
Charitable Deduction: The Senate bill allows for non-itemizers to deduct up to $1,000 annually for single filers and up to $2,000 for married filing jointly. The House bill’s amounts are $150 for individuals and $300 for joint filers and would expire after 2028.
However, in the Senate version, to pay for the non-itemizers, it places limits on people who itemize. In this version, itemizers can only claim donations above a floor, which is generally 0.5% of one’s adjusted gross income (AGI). This means that for every $100,000 of AGI, one would only receive a tax break for contributions exceeding $500.
We foresee the consequences of this provision, should it survive the reconciliation bill, as follows: it may be beneficial to double or triple your charitable giving in one year and utilize a donor-advised fund to make the grants.
One more comment: As of now, there does not appear to be any rule changes to charitable giving from the IRA.
Please let us know if you have any questions. We are happy to discuss at any time.