One, big, beautiful U.S. update

The bill adds new tax cuts and extends tax cuts that were enacted during President Trump’s first term that were set to expire at the end of the year. It ups spending on defence and border security, while tightening Medicaid eligibility and reducing food assistance alongside other government aids. It also includes an increase to the U.S. federal debt ceiling, quelling default concerns (more on that later).

The bill has been deeply contentious, not just between Republicans and Democrats, but within the Republican party too. Supporters argue the bill is pro-growth, that it will lower taxes, improve cost of living, secure borders, strengthen the military and reduce the deficit over time, in conjunction with other policies relating to deregulation, trade (tariffs) and wasteful spending. Critics argue that the bill will disproportionately benefit corporations and the wealthy, that it cuts vital support to those that need it most and that it will add substantially to the national debt

Back in May, the credit rating agency Moody’s downgraded U.S. sovereign debt from Aaa (Highest quality) to Aa1 (Very high quality) on concerns about long-term fiscal sustainability. Admittedly, the size of the debt (~US$36 trillion), servicing the debt and reducing the debt are challenges, and will continue to be a major focal point in American politics, but we believe the situation is far from being a crisis. Financial markets appear to agree as the reaction to the change was muted, much like similar downgrades in 2011 and 2023.

As previously mentioned, the passing of the One, Big, Beautiful Bill Act includes a US$5 trillion increase to the federal debt limit, alleviating immediate default concerns. One might ask, isn’t this just “kicking the can down the road?” Yes, but the idea is to provide the government with some breathing room, allowing it to continue paying its obligations as it works on reducing the debt over the longer term. Given these developments, we do not believe the federal debt is currently a major source of risk. 

Our 12-to-18-month outlook is modestly bullish as additional fiscal accommodation is likely globally. Furthermore, central banks around the world have generally eased monetary policy. Stock markets have also broadly recovered from the volatility we saw earlier in the year. However, we must note that financial assets remain somewhat sensitive to headlines.

Within our portfolios with a tactical asset allocation overlay, we continue to have a tactical overweight to equities relative to fixed income and cash. The bulk of this tactical overweight is in U.S. equities as fiscal support remains expansionary, earnings growth remains relatively high versus other regions and the U.S. Federal Reserve maintains its capacity to cut rates should it need to. Absent a recession, equities should continue their long-term trend higher.

Looking at USD, most other currencies have strengthened versus the greenback year-to-date. Movement has been less driven by interest rate differentials, suggesting that U.S. dollar denominated assets are being rebalanced into other markets, Canada included.

We will continuously monitor the evolving landscape, not just in the U.S., but globally, to determine if adjustments are needed to best position your portfolio for long-term success.