Policy Shocks and Stimulus — The Ripple Effects of Tariffs and Tax Reform

The first half of 2025 was not only a test of market resilience, it was a masterclass in how swiftly policy can reshape the investment landscape. From the surprise tariff escalation in April to the sweeping fiscal reforms passed in June, investors were forced to recalibrate expectations in real time.

Tariffs Return with a Vengeance

The year began with renewed volatility tied to U.S. trade policy. The Trump administration reinstated and expanded tariffs, triggering fears of a global slowdown. The average effective tariff rate, which started the year around 3%, was projected to rise above 20% at one point. Although subsequent negotiations helped ease those fears, tariffs are now expected to settle around 15% — the highest level in nearly 90 years.¹

These policy shifts have had real economic consequences. Businesses have delayed investments, reevaluated supply chains, and faced a more unpredictable operating environment. While the global economy remains in expansion mode, the path forward is less certain.

Enter the One Big Beautiful Bill Act (OBBBA)

Just after quarter-end in July, Congress passed the One Big Beautiful Bill Act (OBBBA). This sweeping legislation extends many provisions of the 2017 Tax Cuts and Jobs Act and introduces new stimulus measures, including:

• Temporary tax deductions on tips and overtime income
• An expanded Child Tax Credit
• Increased State and Local Tax (SALT) deductions
• Enhanced depreciation and business investment incentives

The estimated cost? Over $4 trillion over the next decade — excluding potential tariff revenue.²

Short-Term Stimulus, Long-Term Question

In all, while the OBBBA could be stimulative in the short run, it also raises important questions about the long-term sustainability of U.S. debt. The federal deficit now exceeds 6% of GDP, and gross federal debt is over 120% of GDP. Interest costs alone are approaching $1 trillion annually.³

This dynamic creates two key concerns:

1. A growing share of government spending may be diverted to debt service.
2. Future policymakers may face pressure to enact deep spending cuts or significant tax increases.

Despite these concerns, the market response has been relatively measured. The U.S. dollar has weakened, down roughly 10% year-to-date through 6/30/25, which has helped boost returns for unhedged foreign assets. Interest rates, while volatile, have remained range-bound. The 10-year Treasury yield sits near 4.5%, supported by strong demand and a belief that inflation remains under control.

For investors, the key takeaway is this: policy matters. But it’s the interplay between fiscal, monetary, and trade policy that ultimately shapes the investment environment. While deficits and debt levels warrant attention, they do not automatically translate into higher interest rates or weaker markets, especially in a country with a strong central bank and a diversified economy.

Staying Grounded Amid Policy Whiplash

At SCS, we help clients navigate these complexities by focusing on what we can control: thoughtful asset allocation, global diversification, and a long-term perspective. Just as families benefit from clearly articulated values and open communication, portfolios benefit from clarity of purpose and strategic discipline.

The policy landscape will continue to evolve. But with a steady hand and a clear plan, investors can weather the noise — and stay focused on building lasting wealth.