SPX-500 scaled a new life time high on BBB boost; what’s next?

 

·         At 210 TTM (CY24) EPS, and 6275 CMP, the TTM PE of SPX-500 is now around 30, at bubble zone;  technically, further rally now only sustaining above 6350-6450

·         Trump’s Big & Beautiful Bill (BBB) has no fresh corporate or personal tax cuts; only extension of previous 2017 cuts beyond 2025 (permanent)

·         Marginal tax cut deductions and exemptions may be largely outweighed by Trump’s tariffs and Medicaid-related higher cost of living.

Stimulus addicted Wall Street Futures surged and set to scale a new life time high on hopes of dual stimulus (Trump tax cuts and Fed rate cuts) and less hawkish Trump tariff policies. As of now, the Senate version of Trump’s BBB may face some hurdles, may be modified to some extent, or may not be able to pass at all amid growing divisions within the House Republicans as it may affect the vote bank. But the market is almost 100% sure that Trump’s Big & Beautiful Bill will get passed by the House by July 3 and Trump will sign it into law by July 4, 2025. Then Trump will focus on trade deals. Trump already announced his trade deal with Vietnam (20% tariffs on all original Vietnamese goods and 40% tariffs on China-related perceived transshipments against prior 9.5%); US exports will have 0% tariffs.

Potential market impact of Trump’s Big & Beautiful Bill

The One Big Beautiful Bill Act (OBBBA), as passed by the Senate on July 1, 2025, is a sweeping budget reconciliation bill with significant implications for the financial markets and various sectors. Below is an analysis of its potential impacts based on the Senate’s modified version, which extends the 2017 Tax Cuts and Jobs Act (TCJA), increases spending on defense and border security, cuts Medicaid and SNAP, scales back clean energy tax credits, and raises the debt ceiling. The bill’s estimated $3.3–$4 trillion addition to the federal deficit over a decade, alongside specific policy changes, will influence markets and industries in both the short and long term.

Deficit and Debt Concerns:

·         CBO Estimates: The Congressional Budget Office (CBO) projects the OBBBA will add $3.3–$4 trillion to the federal debt by 2034, including interest costs, with some estimates suggesting up to $5.4 trillion if temporary provisions are made permanent.

·         Financial Market Impact: Rising deficits and a $5 trillion debt ceiling increase have raised concerns about fiscal sustainability. The Budget Lab at Yale warns of a potential debt crisis if investor confidence in U.S. government debt wanes, which could lead to higher Treasury Yields and tighter financial conditions, possibly sparking a recession. By 2054, the debt-to-GDP ratio is projected to reach 183%, with 10-year Treasury yields rising 1.2 percentage points above baseline, increasing borrowing costs across the economy.

·         Higher Bond Yield: Higher deficits are already pushing up Treasury yields despite Trump’s anti-Powell jawboning effort to keep bond yields lower. A spike was observed during House passage in May 2025. This could reduce bond prices and increase borrowing costs for mortgages and small business loans, limiting affordability and stifling construction.

·         Equity Markets: BBB’s direct impact on stocks may be limited, as it largely extends the TCJA’s status quo, with incremental changes relative to the $30 trillion U.S. economy. However, short-term volatility is possible due to uncertainty around House approval and deficit concerns.

Are There Fresh Corporate Tax Cuts?

There are no new corporate tax cuts contrary to Trump’s earlier narrative of 15% from the existing 21%. The Senate version does not lower the corporate tax rate below the TCJA’s 21%; the focus is on extending existing TCJA-2017 provisions rather than introducing new rate cuts. The increase in the Section 199A deduction to 23% and the restoration of bonus depreciation and R&D expensing effectively reduce tax liabilities for some businesses, but these are extensions or tweaks to TCJA policies, not entirely new cuts. The bill’s $3.3–$4 trillion deficit impact (price tag) has drawn criticism from fiscal hawks, making deeper corporate tax cuts politically challenging. The Senate’s narrow 51-50 passage suggests limited appetite for additional revenue-reducing measures without offsetting cuts elsewhere.

The House Freedom Caucus and fiscal conservatives (e.g., Rep. Chip Roy) oppose the bill’s deficit increase and may resist new tax cuts unless paired with deeper spending reductions. However, pro-business Republicans could push for additional incentives, such as a further reduction in the corporate tax rate (e.g., to 15%, as Trump proposed in 2017), though this is unlikely given budget constraints. President Trump has strongly supported the bill but focused on extending TCJA cuts and adding populist measures (e.g., no tax on tips). His comments on Truth Social emphasize “big, beautiful” tax relief but do not explicitly call for new corporate rate cuts, suggesting satisfaction with the current framework.

The Senate’s use of reconciliation limits provisions to those impacting the budget, and the Byrd Rule strikes non-compliant measures (e.g., Medicaid bans for undocumented immigrants). New corporate tax cuts would need to navigate these rules and secure moderate Republican support, which is uncertain given deficit concerns. Business groups like the Precision Metal forming Association and Retail Industry Leaders Association praise the current provisions but have not publicly demanded deeper rate cuts, focusing instead on stability and expensing provisions. The absence of fresh corporate tax cuts limits immediate boosts to corporate earnings but maintains stability via TCJA permanence.

 Extending the 21% rate supports equity valuations, particularly in banking and industrials, but deficit-driven Treasury yield increases could offset gains. Manufacturing, financial services, and traditional energy benefit from permanent deductions and expensing; positive impacts on industrials. Tech firms gain from R&D expensing but face headwinds from clean energy credit cuts. Higher deficits could raise borrowing costs, impacting debt-reliant sectors like real estate and utilities.

In summary, the Senate’s version of the OBBBA does not include fresh corporate tax cuts but makes the TCJA’s 21% corporate tax rate and key business deductions (e.g., Section 199A, bonus depreciation, R&D expensing) permanent, with minor enhancements like the 23% pass-through deduction. The likelihood of new corporate tax rate reductions in the final version is low due to deficit concerns, Senate reconciliation limits, and GOP divisions. The House may tweak provisions to favor specific industries, but significant new cuts are unlikely given the fiscal and political landscape.

During his first term, Trump proposed lowering the corporate tax rate to 15% as part of the TCJA negotiations. However, the final TCJA settled on 21% due to budget constraints and Congressional negotiations. This shows Trump’s preference for a 15% rate, but it was not achieved in 2017. During the 2024 campaign, Trump occasionally referenced further tax cuts, including a potential 15% corporate rate, as part of his economic agenda to boost U.S. competitiveness. Trump’s campaign promise to “push for 15% corporate taxes to bring jobs back,” but this was not a formal component of the OBBBA as introduced.

Short-Term Economic Boost:

·         The bill’s tax cuts and spending increases are expected to boost GDP growth by 0.2% annually from 2025–2027, per the Budget Lab, by averting a fiscal contraction from expiring TCJA provisions. This could support equity markets to some extent, particularly in consumer-driven sectors.

·         The bill prevents a “sharp fiscal contraction” in 2026, benefiting household consumption and corporate investment in the near term.

Long-Term Risks:

·         By 2054, the Budget Lab projects real GDP to be 3% lower than baseline due to higher interest rates crowding out private investment. This could dampen long-term equity market growth and cause an increase in borrowing costs, impacting sectors reliant on debt financing.

·         Moody’s downgrade of U.S. debt from AAA reflects fiscal concerns, potentially spooking international investors and increasing market volatility.

Mixed Impacts for Banks & Financials

·         Financial Services and Banking: Positive Impacts- The American Bankers Association “strongly supports” the OBBBA for its tax relief, including permanent TCJA provisions like lower corporate tax rates and business deductions, which enhance banks’ ability to invest and lend.

·         The extension of the Section 199A deduction (increased to 23%) benefits pass-through entities, including financial advisory firms and small banks, boosting profitability.

·         Permanent 100% bonus depreciation and 30% business interest cap tied to EBITDA support lending and investment activities by reducing tax burdens.

·         The Senate removed provisions cutting funding for the Consumer Financial Protection Bureau (CFPB), Office of Financial Research, and Public Company Accounting Oversight Board due to Byrd Rule violations, limiting regulatory relief for banks.

·         Higher Treasury yields and a potential debt crisis could increase borrowing costs, squeezing bank margins and reducing loan demand.

Energy Sector: Mixed Impact

·         Oil, Gas, and Traditional Energy-Fossil Fuel-Positive Impacts:

The bill promotes “American energy dominance” by increasing oil and gas leasing, reinstating Alaska’s Coastal Plain leases, and reversing the EPA’s methane emissions fee. Repsol Oil & Gas USA supports these provisions for fostering domestic investment and global competitiveness. Traditional energy stocks may benefit from increased production and reduced regulatory costs, supporting short-term gains.

·         Renewable Energy and Clean Technology: Negative Impact (Advantage China)

 The bill cuts $500–$522 billion in Inflation Reduction Act (IRA) clean energy tax credits, phasing out credits for solar, wind, and residential energy products by 2026–2027, and repealing EV credits ($7,500 for new EVs, $4,000 for used) after September 30, 2025. This could lead to 686,000 job losses in clean energy and cancel $522 billion in planned investments. EV companies like Tesla, Sunrun, Lucid Group, and Wolfspeed face challenges due to lost EV and solar credits, with Elon Musk criticizing the bill as “destructive” to innovation. Transferability of credits for nuclear and tech-neutral electricity is preserved, but restrictions on foreign entities of concern (e.g., Chinese battery firms like CATL) limit battery storage investments. Renewable energy stocks may face downward pressure, with Crux Climate noting a “significant loss” of financing tools like credit transferability.

Healthcare: Mixed direct impact, but positive for private insurance and healthcare product/service providers due to a drastic cut in Medicaid budget

·         Negative Impacts: Medicaid cuts of over $1 trillion and stricter eligibility (e.g., work requirements, six-month redeterminations) could result in 7.6–12 million Americans losing coverage by 2034, per CBO and Center for American Progress estimates. This reduces revenue for hospitals, particularly rural ones, despite a $50 billion Rural Hospital Fund. The bill’s cost triggers 4% automatic Medicare cuts unless Congress intervenes, potentially reducing provider payments and impacting healthcare stocks.

·         Positive Impacts: Expanded Health Savings Account (HSA) provisions, including doubled contribution limits ($8,600 for individuals, $17,100 for families) for incomes below $75,000/$150,000 and consolidated catch-up contributions, benefit insurers and financial firms managing HSAs.

·         Healthcare providers may face revenue declines, while insurers could see gains from HSA growth. Public health researchers warn of 51,000 preventable deaths annually due to coverage losses, potentially increasing scrutiny on the sector.

OBBBA’s Medicaid Cuts and Relevant Provisions: Mixed impact on the healthcare industry

·         Medicaid Cuts: Over $1 trillion in reductions over a decade, with stricter eligibility requirements. Healthcare-Related Provisions

·         Health Savings Accounts (HSAs): Doubled contribution limits to $8,600 (individual) and $17,100 (family) for incomes below $75,000/$150,000, with expanded use for over-the-counter (OTC) medications.

·         Rural Hospital Fund: A $50 billion fund to support rural hospitals, potentially benefiting providers in underserved areas

·         Medicare Advantage Scrutiny: While the bill does not directly cut Medicare, a proposed 4% automatic Medicare cut could be triggered unless Congress intervenes, and increased regulatory scrutiny of Medicare Advantage (MA) plans

·         Pharmacy Benefit Manager (PBM) Reforms: The bill aligns with Trump’s campaign promise to “knock out” PBMs, which could affect insurers like UnitedHealth that own large PBMs

·         Trump’s push to reform PBMs, which UnitedHealth’s Optum Rx dominates, could reduce profitability in this segment.  This creates a mixed outlook for insurers, as PBM revenue (a significant portion of UnitedHealth’s profits) may decline, even if insurance enrollment rises.

·         Other Provisions: Permanent TCJA tax cuts, a $5 trillion debt ceiling increase, and cuts to clean energy credits, which indirectly impact healthcare by increasing the deficit and potentially raising borrowing costs

Manufacturing and Industrials: Mixed Impact

·         Positive Impacts: The bill incentivizes U.S. manufacturing with tax breaks for American-made vehicles (deductible auto loan interest) and permanent TCJA provisions like 100% bonus depreciation and R&D expensing. The Precision Metal forming Association supports these for job creation and investment; potential benefits for industrials from pro-growth tax provisions.

·         Negative Impacts: Higher interest rates from rising deficits could increase borrowing costs for capital-intensive manufacturers.

·         Stocks like Polaris Inc. may benefit from domestic manufacturing incentives, but tariff-related costs could offset gains for small businesses.

Technology and AI: Mixed Impacts

·         A provision banning state AI regulation for 10 years could reduce compliance costs for tech firms, but it faces opposition from Rep. Marjorie Taylor Greene and others for undermining state rights.

·         The loss of clean energy credits impacts tech firms reliant on renewable energy (e.g., data centers), while spectrum reallocation for broadband supports AI and tech infrastructure.

·         Tech stocks may see mixed effects, with short-term gains from regulatory relief but long-term risks from energy cost and borrowing cost increases.

Agriculture: Slight positive

·         Positive Impacts: The bill increases spending on crop insurance ($6.3 billion), disaster relief ($2.9 billion), and farm safety net programs, earning support from 45 agriculture groups and the United States Peanut Federation for addressing rising costs and low commodity prices.

·         Negative Impacts: SNAP cuts of $285 billion could reduce demand for agricultural products by limiting food purchasing power.

·         Agricultural firms may benefit from subsidies, but reduced consumer spending could pressure revenues.

Defense and Aerospace: Positive

·         Positive Impacts: The bill allocates $150 billion for defense, including $20 billion for munitions, $12 billion for nuclear modernization, and $9 billion for service member benefits, boosting companies like AeroVironment. Funding for Mars missions ($10 billion) and space shuttle relocation ($85 million) supports aerospace

·         Defense stocks are likely to rally due to increased spending and modernization efforts.

Education and Student Loans: Negative

·         Elimination of in-school interest subsidies for student loans and stricter Pell Grant eligibility (e.g., higher course loads) could reduce access to higher education, particularly at community colleges, impacting enrollment and institutional revenues.

·         For-profit education providers may face challenges, while risk-sharing provisions could penalize colleges with low loan repayment rates.

Summary

The OBBBA’s Senate version is likely to have a mixed impact on financial markets and sectors. Short-term GDP growth and personal tax cuts could boost equities, particularly in banking, defense, private healthcare product & service providers (medical insurance and hospitals), and traditional energy, consumption, and investment. However, the $3.3–$4 trillion deficit increase raises long-term risks, with higher Treasury yields and a potential debt crisis threatening market stability. Sectors like renewable energy may face significant headwinds from credit and program cuts, while manufacturing and agriculture may see gains from tax incentives and subsidies. The House’s upcoming vote could alter provisions, particularly on clean energy and SALT deductions, potentially moderating or exacerbating these impacts.

Corporate Effective Rates: Post-OBBBA, corporations face effective rates of 18–20%, similar to TCJA levels, while pass-through entities see 8–12% due to the 23% Section 199A deduction and other expensing provisions.

Personal Effective Rates: Low-income households benefit most from tip and overtime deductions, with effective rates dropping to 0–5%. Middle-income households see rates of 8–12%, high-income households 18–22% (due to SALT), and top earners 28–31%. New deductions are targeted, not broad rate reductions. House negotiations could enhance SALT or tip deductions, slightly lowering effective rates further, but deficit constraints make significant new cuts unlikely.

Conclusion

Trump's personal Tax & Medicaid Cuts and Tariff Hikes: May neutralize each other to some extent, but the overall effect is negative. The OBBBA’s tax cuts provide a short-term economic boost (0.2% GDP growth annually), but tariff hikes increase consumer costs, and potential healthcare, education and food costs raise long-term risks, partially neutralizing benefits.

The overall effect is likely negative due to:

·         Deficit-driven yield increases Trump's borrowing costs despite potential Fed rate cuts and Trump’s ongoing tantrum on Powell in a desperate effort to keep the bond lower

·         Tariffs outpacing tax cut benefits for households ($1,500–$3,000 vs. $500–$1,000)

·         Medicaid/SNAP cuts reducing disposable income, potentially worsened by future Social Security risks

·         Potential higher education costs and overall higher cost of living

·         Sectoral pressures from tariffs and regulatory changes (e.g., PBM reforms) offset some corporate tax gains

·         Trump’s higher defense spending may boost military military-industrial complex, i.e., note bank (election  & party funding), but his vote bank may be negatively impacted.

·         No major boost in SPX-500 EPS for CY: 25-26, and in contrast, may not grow even at a 10% trend CAGR rate.

Combined Effects and Market Impact

The interplay of these policies creates a stagflationary risk—higher inflation, higher unemployment, coupled with slower growth—complicating the Fed’s dual mandate of price stability and full employment. GDP growth is projected at 1.4% in 2025 and 1.6% in 2026, down from 2.8% in 2024, reflecting tariff-related drags. Recession odds have risen to 53%–60% for 2025. The stock market may experience continued volatility as investors digest tariff impacts and Fed policy. Optimism about personal tax cuts and potential Fed rate cuts could support equities, particularly if trade negotiations yield concessions. However, inflation pressures and supply chain disruptions may cap gains. Trump is not spending meaningfully on industrial and logistical infrastructure (like HSR) to compete with mighty China.

Fair Valuation of S&P 500:

The stock market is a forward earnings discounting machine; it’s all about earnings (EPS); everything others is simply noise and an excuse to go up or down. The SPX-500 EPS for CY24 was around 210 vs 192 (Y/Y); i.e., grew by around 9.22% Overall, trend and run rate for the last 7 years indicate 10% CAGR for CY25-28 SPX-500 EPS. In that scenario, the CY25 EPS should be around 231, and assuming 27 and 22 PE as best and base case scenarios, the best case fair value may be around 6242, and the base case fair value 5086.

Technical outlook: SPX-500

Looking ahead, whatever may be the fundamental narrative, technically SPX-500 (CMP: 6275) now has to sustain over 6400-6450 for a further rally to 6525/7000-7500/8300 in the coming days; otherwise, sustaining below 6350/6300-6250/6200, SPX-500may again fall to 6000/5800-5600/5300 in the coming days.