Our previous commentary was focused mainly on the new administration’s tariff policies. While still a major concern in our forecast, the so-called Big Beautiful Bill’ has taken over
the conversation. We’ll talk briefly about the short-lived war in the Middle East and what the tea leaves tell us about the Federal Reserve.
Tariff Fallout
In the first quarter, in anticipation of higher import costs, businesses rushed to get as many imported goods as they could before tariffs took effect in April. Since accounting for
imports decreases GDP, this led to an artificial drop in the first quarter, revised from -0.2% to -0.5%. Conversely, the second quarter saw a steep decline in imports, causing the same
equation to flip. As a result, GDP is going to appear abnormally strong. Economic consensus should show that a rolling 12-month average, or “annual growth” to be about
1.7%. A bit lower than the historical average of around 2%.
With growth expected to gradually slow down, the Federal Reserve should be strongly considering lowering interest rates. Under normal circumstances, we should see 2 to 3 rate
cuts before the year is out. But they seem to be on hold, waiting to see which is the greater threat: a slowing economy or tariff related inflation. Our expectation is that Trump will
continue to extend his ‘deadlines’ until he can secure favorable terms, but that means the market will still suffer that measure of uncertainty in the next months to come.
Middle East Turmoil
The events between the 12th and 24th of June between Israel and Iran were as intense and concerning as they were brief. Culminating in a U.S. bombing of Iran’s nuclear facilities on
June 22nd, Iran was forced into a tenuous ceasefire on June 24th. While both sides have taken pot shots at each other since then, major hostilities seems to have cooled.
Market reactions to the conflict were virtually non-existent. The S&P actually rose a little under 1% during the conflict. The price of crude oil, understandably volatile during Mid East
turmoil, briefly rose to $76 from $65 per barrel on the 12th, but quickly fell back to pre-conflict prices where it roughly sits as of this writing.
New Legislation
Congress and President Trump signed into law on July 4th so-called ‘Big Beautiful Bill’. We won’t go into all the aspects of this new legislation, but we’ll highlight the parts that are
most likely to affect the average taxpayer.
Here are some of the highlights:
• Permanent extension of 2017 tax cuts for individuals and businesses.
• No tax on tips and overtime pay, with caps in place.
• Expanded SALT deduction cap from $10,000 to $40,000 through 2028. This is especially good news for California taxpayers considering how many filers reached the previous cap.
• Increased child tax credit by $200, indexed to inflation. Up from $2,000.
• Estate tax exemption rose to $15M (individual) / $30M (joint) up from $13.61m. This may sound like a tax break only for the rich but it also effects family farms & other family businesses with fixed assets exceeding those limits from having to sell when transferring those assets from one generation to the next.
• $6,000 additional deduction for seniors. This will eliminate taxes on Social Security income for most senior filers.
• $1,000 savings program for newborns. It works like an IRA, invested in a U.S. stock fund index, but with some unique restrictions on when withdrawals can be made and what the money can be used for. Families and employers will be allowed to contribute with limits.
There is a bill submitted in the House of Representatives that would eliminate the Capital Gains taxes on the sale of your primary residence. As of this writing, the bill has only been submitted and has a long way to go if it’s ever going to be law.
While it’s impossible to please everyone and not everyone is happy with the new legislation. It does increase the Federal debt limit, angering fiscal conservatives. Tax cuts can spur growth, but rising debt is worrisome. It also, tightens the rules and requirements on social programs. Something that social liberals warned about during the last election cycle.
Markets
In Q2 2025, the S&P 500 gained 10.6%, recovering from a 12.1% correction earlier in the quarter to close at record highs. There was strong performance driven by sectors like Technology (+23.7%) and Communications (+18.5%), though Energy (-8.6%) and Healthcare (-7.2%) fell behind.
Our research year-end 2025 value of the S&P 500 is 6,000
to 6,100.
The Magnificent 7 outperformed the broader market, with NVIDIA, Microsoft, and Meta hitting or nearing record highs, while Tesla and Apple underperformed. Easing trade tensions, a strong U.S. economy, and the group’s structural advantages in AI and technology. However, going forward, high valuations and ongoing tariff risks remain concerns for Q3.
Conclusion
As the second quarter of 2025 ends, we’d just like to take a moment and reflect on the tragedy that has taken place in Central and Southern Texas as well as parts of New Mexico. We’d also like to recognize the sacrifice and heroism of those individuals, both civilian and professional, who risked their lives to save others. It’s understandable we become fixated on the news when events like this happen, but it’s also helpful to understand that tragedies like this can happen on a local, smaller scale. We urge everyone to get involved with your local disaster relief agencies and find ways to contribute money and/or time and to learn how to prepare for whatever risk (fire, earthquake, etc.) is prevalent in your area.
In times of crisis, neighbors should come together.
We here at Pacific Leader wish you and your family a happy Summer!
If you have any questions, please reach out to us via our new website at:
www.pacificleaderfinancial.com
You can always call our office at: (888) 797-5881 x7720
Sincerely,
Matthew Dennis, CPA, AIF
These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.