The Market’s Midyear Moment: Policy Shifts, Investor Sentiment and the Road Ahead

Markets began July with strength, but growing uncertainty around fiscal policy, corporate earnings and trade developments continue to complicate the outlook. The passage of the “Big Beautiful Bill” on July 4, 2025 marked a major policy shift. The legislation extends 2017 tax cuts and significantly raises the property tax deduction cap for high-tax states like New York and California, increasing it from $10,000 to $40,000 for several years, though income limitations apply. It also increases the estate tax exemption to $15 million per individual. These changes represent a significant win for high-net-worth families, particularly those living in states with higher tax burdens. Some of these tax cuts will be offset by cuts to Medicaid. However, the bill does little to address the growing federal deficit, a concern that both sides of the aisle have acknowledged but not yet meaningfully tackled.

Also included in the legislation is a new child savings vehicle. Children born between 2025 and 2028 will receive $1,000 at birth into a government-created investment account. Families can contribute up to $5,000 annually in after-tax dollars (inflation-adjusted), employers up to $2,500 per year and nonprofits and government entities may also contribute. The funds will be invested entirely in equity index funds. At age 18, up to half of the account may be used for education, a first-time home purchase or other qualified expenses. Full access is granted at age 30.

Despite the continued sources of uncertainty, the market hovers near all-time highs. The S&P 500 has surged 25% from recent lows, with much of that gain occurring over just a two-month period. It’s a rare move that has only occurred a handful of times in the past 70 years. In each of those instances, the index was higher one year later, with an average return of 31%. However, recent gains have been accompanied by renewed speculation. Meme stocks are once again gaining traction, Special Purpose Acquisition Company (SPAC) activity has returned and companies with no earnings have been among the best performers. Sentiment measures, such as the Barclays Euphoria Index and the American Association of Individual Investors, are registering near their highest levels in years. While optimism can support market gains, it can also signal the potential for a pause or pullback when sentiment becomes extreme.

Economic data continues to send mixed signals. The June 2025 jobs report showed a headline gain of 147,000 jobs, with unemployment falling to 4.1%. However, much of that growth came from state and local government hiring, while private payroll growth was more modest. Inflation indicators, including the Consumer Price Index (CPI), Producer Price Index (PPI) and Personal Consumption Expenditures (PCE), have continued to trend lower. Despite this, investors have dialed back expectations for an interest rate cut at the Federal Reserve’s July meeting at the end of the month.

All eyes now turn to corporate earnings. Second-quarter results over the next several weeks will provide a clearer picture of how companies are navigating slowing inflation, ongoing policy shifts and the evolving trade landscape. Of particular concern are new tariff threats. On July 7, 2025, the Trump administration floated additional tariffs on Japan, South Korea and other countries. Broader measures, including a blanket 10% additional tariff on imports from any country with “anti-American” trade policies, remain under discussion. These developments have created added uncertainty for businesses, some of which have already suspended forward guidance.

Despite the noise, certain market segments remain compelling. International equities have gained momentum after years of lagging U.S. performance. Bonds continue to remain a source of dependable income and portfolio stability amid uncertainties in the equity market. Small-cap stocks, which recently traded at a 30% discount to large caps, may offer future upside, particularly if economic growth remains stable. That said, nearly half of the companies in the Russell 2000 remain unprofitable, which reinforces the importance of selectivity in this space.

After such a strong run, some moderation in equity markets could be healthy, as it reflects the natural rhythm of markets as they digest new information. In the meantime, staying diversified, disciplined and aligned with long-term goals remains an effective way to manage ongoing volatility.

As always, if you have questions about how recent policy or market developments may impact your portfolio, we are here to help.