Economic and Capital Market View

Initial Take on Tariff Rates and the Big Beautiful Bill (BBB)

Studying and keeping up with economic and capital market developments these days feels like drinking from a firehose —it’s a flood of information, and it’s coming fast. That’s why maintaining perspective is more important than ever.

Since the national election late last year, we’ve framed our macroeconomic outlook around the theme “Three Yards and a Cloud of Dust” to illustrate a slow-growth environment surrounded by a lot of noise. And most of the surrounding noise is the result of shifting policy priorities coming out of Washington.

Complementing that, our Investment Strategy team has been operating under a separate but aligned theme: “Clear Air Turbulence.” This concept suggests a favorable environment—characterized by lower-than-normal inflation, reasonable interest rates and solid earnings—but also one where occasional bouts of volatility may arise unexpectedly.

Understanding the “Four Buckets”

Our broader economic framework also includes what we’ve dubbed “Trump’s Four Buckets,” referring to the four key initiatives under President Trump’s second-term agenda. These are:

• Tightening immigration policy by removing undocumented immigrants
• Overhauling the tax code
• Raising tariffs on imported goods
• Reducing waste and inefficiencies in government spending (DOGE)

Individually, each of these can impact both economic performance and capital market behavior. Taken together, they increase uncertainty and volatility—not only in economic activity, but in asset pricing as well. While we’ve seen developments in all four areas this year, tariffs and the tax plan—aka the Big Beautiful Bill (BBB)—are currently drawing the most attention.

Policy in Focus: The BBB and Its Economic Implications

Our overall macro view of the BBB, paired with the anticipated tariff changes, is that the tax extensions and additional cuts in the BBB should support growth and help cushion the economy from the modest stagnation forces likely to be triggered by tariffs.

Yes, the BBB adds to the deficit—but that’s more of a long-term concern. So far, it hasn’t spooked the bond markets; the “bond vigilantes” don’t seem too alarmed at his stage. Key cost-cutting provisions, such as Medicaid reductions, don’t kick in until late 2026, well after the midterms. Meanwhile, other elements—no tax on tips, full expensing for capital investments, higher SALT deductions and reduced taxes for seniors—are politically well-crafted.

While new tariff rates are still largely undefined, we and others are beginning to evaluate their likely economic impact—particularly as a new revenue source for the government.

Tariff Outlook and Impact

As tariff policy becomes more central to the economic conversation, here are several key considerations we believe are worth noting:

• Tariffs are likely to add inflationary pressure while also applying downward force on macroeconomic growth. In some cases, the inflation may be a one-time upward price adjustment in certain goods, depending on how other countries respond.
• Just how much inflation might result? It’s hard to say definitively. However, the San Francisco Fed estimates that about 11% of U.S. consumer spending goes to imports. Under current proposals, Trump’s average tariff rate could be around 18.5% (Budget Lab, Yale University)—though that’s still in flux.
• Combining these figures offers a rough guide: if importers passed through the full tariff and consumers didn’t adjust their behavior, we could see up to a 2.0% inflation increase. That’s unlikely—but it provides a directional baseline.
• Without getting overly technical, it’s fair to assume tariffs will add some inflationary pressure, at least in the short term.

When it comes to economic growth, the downside effects of tariffs are similarly difficult to pin down. But the economic team at J.P. Morgan has outlined several key risks:

• Tariffs act as trade barriers, raising prices and slowing import/export activity.
• They can distort resource allocation—making some industries appear cheaper while raising input costs in others.
• Retaliation from trading partners could magnify the overall drag on GDP.

Bottom line: higher inflation plus weaker growth sets the stage for a slightly more stagflationary environment beginning in the second half of this year and potentially extending into 2026, depending on how enduring the tariffs prove to be.

The Big, Beautiful Bill (BBB)

Attempting to assess the economic effects of the BBB— like the effects of rising tariffs—requires educated guesswork. But to offer a starting point, we turn to the Tax Foundation, a respected nonpartisan think tank that has modeled key provisions of the bill. Their summary, along with input from others, includes the following:

• In 2025, the bill’s effect should be limited since its primary cost comes from extending provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire. The extension should have little near-term effect on GDP or inflation.
• Without the extension, the Wharton School estimates economic contraction of 1.0% to 1.2% in 2026.
• With the extension included, the BBB could add 0.2% to 0.5% to GDP growth in 2026, helping offset the drag from tariffs.
• Growth-friendly features include lower taxes on tips and overtime and tax relief for senior citizens.
• A potentially underestimated driver: full expensing of new business investments, which could significantly boost capital expenditures.
• Defense and border security spending could also contribute modestly to near-term growth.
• Medicaid cuts are delayed until after the 2026 midterms, so their economic effect will be postponed.
• The bill is expected to raise real wages by $4,000 to $7,200 annually, depending on income level and household structure.
• The SALT deduction cap has increased to $40,000 (from $10,000), reducing tax burdens for residents in high-tax states.

Our takeaway? As economist Milton Friedman once said: “There are no solutions—only trade-offs.” While the BBB introduces policies that may support growth and incomes, it also increases federal borrowing, which could raise interest rates over time. The dynamic scoring suggests a potential $3.8 trillion increase in the deficit over the next decade.

What This Means for Investors

Investment positioning: Equities still look attractive in the near term due to solid earnings and supportive tax policy. We recommend you stay diversified but not overly defensive.

Inflation sensitivity: We expect slightly higher prices in 2026, especially for imported goods. Keep an eye on purchasing power and cost-of-living adjustments if you’re drawing income.

Interest rates: Rising deficits may eventually pressure rates higher—bond positioning may need to reflect this in the years ahead. Work with your advisor on this.

Tax planning: If you’re a small business owner, retiree or tipping industry worker, you may benefit from BBB provisions. Check in with your tax advisor.

Final Word: A Stagflationary Undercurrent

Tariff-related changes are likely to further restrain growth for the remainder of 2025, as businesses deal with inventory overhangs and consumers adjust to higher prices. As those price increases are absorbed, we expect inflation to tick upward.

The economic impact of the BBB likely won’t be felt until 2026. Most of the benefit stems from extending prior tax policy, but it does offer some meaningful support to growth.

We currently estimate that inflation may rise by 0.5% to 1.0% above 2025 levels, driven by tariffs and secondarily by fiscal changes. Though some models predict a 2% inflation boost, we view that as a high-end scenario.

All told, the combined effects of the “Four Buckets” may tilt the economy toward a stagflation-like environment—slow growth, mild upward inflation pressure. Despite that, our Investment Strategy team maintains a near- to intermediate-term equity-friendly outlook, even as long-term costs loom on the horizon.

So, for now: smile and be happy as an investor. The bill may come due—but perhaps not for us. That price may fall on our children and grandchildren.