This summer, President Donald Trump signed the One Big Beautiful Bill Act into law, which has a primary goal of permanently extending provisions of the 2017 Republican tax overhaulthat were set to expire at the end of the year.
The bill also includes hundreds of additional changes to the U.S. tax code and economic policy. In the near term, the act should be stimulative for the economy and likely the financial markets. Looking further out, the forecast is less clear as the bill doesn’t fully address the perpetually growing debt problem in our country.
Two major factors have been consuming investors and markets of late: uncertainty surrounding tariffs and inflation.
Without opining on the validity or effectiveness of tariffs, they have created a challenging environment for many corporations across a number of industries. CEOs routinely discuss their strategies in managing the tariff pressure, as higher prices for goods are likely to get passed on to consumers.
Meanwhile, the Federal Reserve, up until its September meeting, had been fighting inflation by way of raising interest rates. From the start of the Fed rate-raising cycle in March 2022, the effective federal funds rate rose from near zero in early 2022 to about 5.3% in 2023.
As labor markets start to show signs of weakness and prices of goods and services stabilize, inflation seems to be under control. The effect of the One Big Beautiful Bill Act, as well as tariffs, threatens to subvert that dynamic at a time when the Fed is becoming more stimulative and lowering rates. Add in that valuations for stocks are at an extreme historical high (in some sectors), and the outlook for investors is less than sanguine.
Where should an investor turn? The S&P 500, by most every measure, is in an extended bull market. But looking a bit deeper, much of the performance has been centered on a dozen or so stocks, mostly in the technology space, with exposure to artificial intelligence.
The top 10 largest public companies now represent nearly 35% of the total valuation of the S&P 500. Put another way, there is nearly $20 trillion of total aggregate value in 10 companies. (The total value of the S&P is about $57 trillion across about 500 stocks.)
Large companies in the tech sector, commonly referred to as “mega-cap stocks,” have been the darlings of the market for the better part of seven years. Investors should start to look at those boring industries, the former blue-chip stocks that have not only underperformed but represent a much more reasonable valuation.
The easing of interest rates should help to support equity prices in the near future. But valuation, concentration risk and the potential of inflation to reignite due to the One Big Beautiful Bill Act remain a long-term challenge.
It’s been about five years since the last financial crisis and, with the cadence of financial crises in our country’s history, that time may be coming again soon. We may be entering the final phases of a technology-led stock market rally.
Does that mean that investors should head for the exits? Absolutely not. But awareness of the underlying risks is heightened. Invariably, the pendulum will swing. Better to be prepared than surprised when it does.
Jeffrey Liguori is executive vice president and senior portfolio manager at the Westerly offices of Bradley, Foster & Sargent Inc., a registered investment adviser firm.
