US equities: Assessing the ‘One Big, Beautiful Bill’

President Donald Trump’s economic policy began with a bang, marked by his liberal use of executive orders to impose tariffs on all of the US’s trading partners.

Whilst we can be criticised for initially underestimating the degree and breadth of the president’s use of tariffs, it would appear we are approaching what will be a manageable position for corporate America. However, our recent experience tells us we should not completely rule out negative surprises.

In President Trump’s mind, tariffs serve two purposes. First, he wants to use them as a stick to encourage businesses to relocate productive capacity back to the United States. In this endeavour, he is likely to use sector-specific tariffs quite liberally, for instance on semiconductors and parts of the pharmaceutical supply chain.

However, by definition, President Trump does not want everything to return to the US (if that were even possible) as he also needs the tax revenue generated by tariffs to help offset the tax cuts he has promised.

One Big, Beautiful Bill

This brings us to his next priority: enshrining into law his agenda on domestic taxation and spending, in what has become known as the One Big, Beautiful Bill. You can say what you like about the President, but there is no doubt that he does have a neat turn of phrase.

Trump has chosen to achieve this via a process called ‘budget reconciliation’, which requires a simple majority in both houses to pass. Given the Republicans have a – very narrow – majority in both houses, it should in theory not need the help of the Democrats to be pushed through.

So far, this has proved to be the case. On 22 May, after weeks of negotiations, the House of Representatives passed the bill by 215 votes to 214.

The bill now passes to the Senate, where the Republican majority is 53 versus the Democrats’ 47. Unlike the House, the Senate will be able to make changes to the bill. Initial indications are that these are likely to be substantial.

Tax cuts

Not surprisingly, cutting taxes will not generate that much controversy amongst Republican lawmakers. The first order of business will be to extend the personal tax cuts President Trump enacted during his first term, which are due to expire at the end of this year. He has also promised no taxation on tips and overtime.

Regarding corporate tax, President Trump campaigned on lowering the corporate tax rate on domestically generated profits to 15%. However, recently, this proposal has been shelved in favour of more investment-led taxation incentives.

These policies have the advantage of being a narrower tax giveaway but also coherent with the policy of encouraging domestic investment in production. Notable amongst the current suggestions are immediate tax breaks for R&D expenditure.

This is precisely the sort of policy we envisioned at the outset of this administration, as it will boost US investment, strengthen domestic companies and lead to increased high-value-added jobs in research and development, among other benefits.

The real tension lies in spending cuts

However, as we all know, giving away taxpayers’ money is much easier to do than taking away money from programmes which provide services to taxpayers ’for free’.

You may recall that during his first administration, President Trump repeatedly attempted to repeal ObamaCare, which had greatly expanded the number of people eligible for Medicaid (healthcare coverage for low-income individuals).

While there are a number of ideologues and fiscal conservatives who want to cut Medicaid expenditures dramatically, there are as many, possibly more, Republican Congresspeople who are highly aware of the number of their constituents who rely on this support and are pushing back hard against any cuts to Medicaid.

It is this disagreement over government expenditure which could mean that the president’s initial deadline of 4 July for passing this legislation is not met, and we should not rule out the possibility of the president needing the pressure of the calendar to force a resolution. The expiry of President Trump’s 2017 personal taxation cuts is something no Republican wants to see happen.

However, every administration is aware of the absolute necessity of avoiding its own Liz Truss moment; hence, the balance between tax cuts and spending cuts will need to be something that the market (by which I mean the bond market) can accept.

Moving in the right direction?

Whilst it has been a rollercoaster ride for markets since Trump’s inauguration, with somewhat of a false start to the ‘positives’ that the market was looking for in his presidency, we do believe we are moving towards more of a ‘good’ outcome that we were playing for at the start of the year.

We are cautiously optimistic that we will reach a coherent solution on tariffs as described above. We are also encouraged that the administration is attempting a joined-up policy using both carrot and stick to encourage domestic investment, policies which we think will be positive for the domestic economy. That being said, there is a narrow path to be negotiated between what’s good for the economy and what the bond market can accept.