Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

How the timing of key policy moves is shaping our outlook

June 6, 2025

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Economic data is starting to show impact from tariffs
• Timing of tariffs and tax cuts matter, but net result roughly a wash
• Debt ceiling drama adds another wrinkle to tax debate in Congress

Smooth Sailing or Summer of Suspense? At first glance, markets seem calm. The S&P 500 is once again approaching the 6,000 mark—just 3% off its all-time high—and interest rates have steadied after last month’s sharp rise. But from our vantage point, this summer may not be as smooth as it looks. While easing trade tensions and a strong 1Q25 earnings season have helped fuel optimism, there are still big questions ahead. Developments in Washington—especially around tariffs and the upcoming tax and spending bill—could stir up volatility and send ripple effects through the economy and markets. We’ll be diving into all of this during our next webinar on Monday, June 9 at 4 PM. Join us here as we break down what’s happening, what’s at stake, and what it could mean for investors. In the meantime, here’s how the timing of key policy moves is shaping our outlook:

• Economic Activity Showing Cracks | Up until recently, the economy had shown resilience—especially when looking beyond confidence surveys and sentiment data. But as we’ve mentioned before, the full impact of tariffs was always expected to take time to show up in the ‘hard’ data. This week, we’re starting to see some of those effects surface. A few early warning signs have begun to emerge in areas like:
• Consumer Spending—After a surge in March—when motor vehicle sales hit their highest level in four years due to buyers rushing to beat new tariffs—May brought a sharp reversal. Sales dropped by the largest MoM decline in five years, falling to nearly a YTD low.
• Manufacturing And Service Sector—Even though they’re both survey-based indicators, the latest ISM reports for May raised some red flags. The manufacturing index stayed in contraction, while the services index dropped into contraction for the first time in eleven months. What’s more concerning is that key components like “new orders” and “backlogs” fell to multi-year lows—pointing to weakening demand ahead. Across both surveys, business leaders were nearly unanimous in voicing frustration over tariff policy.
• Labor Markets—The labor market showed more signs of softening. Job growth eased to 139k jobs created in May; jobless claims rose to 247k—an eight-month high; and the Challenger Job Cuts report showed a 47% year-over-year increase in layoffs for May. Notably, the services sector was the primary driver of this weakness, with services-related job cuts reaching their highest level since 2020.
• Tariffs Now, Tax Cuts and Spending Later: Why Timing Matters | When it comes to the economy, timing is everything—and that’s especially true this year and next. Right now, tariffs are likely to begin acting as a drag on growth. Since they went into effect in April, we’ve started to see signs of slower activity, particularly in consumer spending. That’s why we’ve revised our growth expectations for this year downward. In contrast, the proposed tax cuts—part of the broader tax and spending bill—aren’t expected to kick in fully until 2026. However, while the extension of the 2017 tax cuts would simply maintain the current baseline, new provisions—like eliminating taxes on tips and overtime, and expanding the SALT deduction—could add some fuel to the economy next year. So, what does this all mean? In the near term, tariffs are a headwind. In the longer term, tax cuts may offer some tailwind. But when you add it all up, the net effect on the economy overall looks fairly balanced—essentially a wash. Of course, this could change depending on how the final legislation shapes up— or if legal challenges to the tariffs gain traction. That’s why we’re keeping a close eye on every development.
• Tariff Impact On Earnings Still Ahead | The 1Q25 earnings season delivered strong results, with S&P 500 earnings rising ~13% YoY—well above the 7% growth expected at the end of March. However, it’s important to keep in mind that these numbers reflect conditions before the latest round of tariffs took effect, meaning the full impact hasn’t yet been reflected in the data. Looking forward, earnings estimates for the rest of the year (e.g., 2Q through 4Q) have been trending lower—down ~4% over the past two months. That aligns with what we’re hearing from companies like Walmart, Best Buy, and Nike, which have all indicated plans to raise prices in response to tariff pressures. These price increases could weigh on consumer demand and squeeze profit margins. As a result, we see further downside risk to full-year earnings. While the consensus is currently forecasting $263 in S&P 500 2025 earnings, our estimate is more conservative at $255.
• Beware Of Rate Volatility Later This Summer | With the government’s projected 'x-date'—the point when it could run out of money— approaching later this summer, all eyes are on the timing of the tax bill. That’s because a debt ceiling increase, essential to avoid a government default, is likely to be a key part of the package. The window is tight. The bill is expected to pass sometime between July and August, but the x-date is looming in August. That leaves little room for delays—and sets the stage for potential last-minute drama. Even if the debt ceiling is resolved in time, the Treasury will then need to ramp up bond issuance to refill its coffers after months of using emergency funding measures. That could put fresh pressure on the bond market. With long-term fiscal concerns already in focus, a repeat of 2023—when 10-year Treasury yields briefly spiked to 5%—can’t be ruled out. While we expect any such move to be short-lived, investors should brace for more rate volatility this summer.

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