What Is the “Big, Beautiful Bill” and Why Is It Impacting Markets?
This week, politics once again became an influence on markets, but it wasn’t tariff policy. Instead, it was domestically focused, specifically the progress (or lack thereof) of the Republican “big, beautiful bill.” This drama has impacted markets mainly by pushing yields higher and weighing on stocks, and that’s likely to continue (and possibly intensify) as this situation comes to a head over the next several weeks.
Given this influence on markets, I wanted to go through what the big, beautiful bill is and why it matters to markets. What Is the Big, Beautiful Bill? The big, beautiful bill is the name given to the “continuing resolution” to fund the government, extend the debt ceiling and pass much of the Republican/Trump agenda. To make it a bit simpler, think of the continuing resolution as the budget framework for the government over the coming years that will fund policy changes the administration wants to implement.
What’s in the Big, Beautiful Bill? A lot. Most of it is largely mundane government funding extensions, etc. But there’s a lot new in the bill that matters to markets. First and foremost, this extends the 2017 Tax Cuts and Jobs Act (TCJA) that is already assumed by markets and needs to be done, otherwise it’d be a new market negative. Second, the bill funds the execution of several Republican/Trump agenda items such as $50 billion to build the wall on the Southern border, $150 billion for increased defense spending (including the “Golden Dome” missile defense system), eliminating taxes on tips and overtime work and 3) Reduced spending and increased oversight on Medicaid and “Food Stamps” programs.
Why Does This Matter to Markets? This matters for two reasons: First, the extension of the tax cuts are important for economic growth. Again, markets fully expect this to happen and it almost certainly will. However, if it does not pass, that would be a tax increase on the consumer and likely weigh on economic growth. Second, the fiscal state of the U.S. As you may have noticed, there’s a lot of specificity on additional spending proposals to advance the Republican agenda, but there is not a lot of specificity on what spending offsets will occur. Point being, if the market views the big, beautiful bill as spending much more than it saves and further increasing the deficit, it will send Treasury yields higher (we saw some of that yesterday) and that will weigh on stocks.
What’s the Current Status of the Big, Beautiful Bill? It’s going through the process. Part of the holdup is SALT (state and local taxes). As those of you in high-tax states will remember, TCJA capped SALT deduction at $10k, increasing the tax burden for higher tax states vs. lower tax states. A group of Republican House members from blue, high-tax states have named themselves the “SALT Caucus” and they are withholding support for the bill until they get SALT relief. A compromise may have been struck yesterday by raising SALT deductions to $40k. However, any increase to the SALT deduction will only make the bill even more deficit negative and that’s one of the reasons that we saw Treasury yields rise yesterday.
Negotiations are ongoing and there are two unofficial deadlines to watch. First, Memorial Day. The House wants passage of the bill by Memorial Day (meaning they only have a few more days). Next, President Trump wants the bill passed into law by July 4th (that’s admittedly aggressive, but that’s the apparent target). Potential Future Market Impact. While there will be drama along the way, in the end the big, beautiful bill will almost certainly pass and most analysts expect that will be a mild positive for markets, as it’ll provide some additional fiscal stimulus (additional government spending) and solidify that taxes won’t go up on consumers (in addition to giving a mild tax cut from SALT deduction increases, no tax on tips, etc.).
So, it should be a slight tailwind but nothing substantial. However, the fiscal side of this matters. The 10-year Treasury yield is approaching 4.60% and it’s risen because the big, beautiful bill appears to have a lot of new spending in it but an unclear amount of spending cuts. If the bill becomes law and it’s seen as substantially deficit negative, it will push yields higher. And if the 10-year yield rises to a new 2025 high above 4.80%, then the negative influence from higher yields will likely offset the mild positive of tax cuts and additional marginal Federal spending.
Bottom line, the fiscal situation matters here and that’s why we shouldn’t assume passage of the big, beautiful bill will be an automatic positive for stocks. It’s unlikely to be a direct negative, either, but I wouldn’t necessarily count on it to boost growth materially or fuel a rally, unless the fiscal side is as “beautiful” as the rest of the bill.