Market Update: Debt, Inflation, Tariffs & Geopolitical Tensions

The head-spinning pace of daily events continues as markets react but mostly hold near record highs. We are once again seeing markets driven by the same seven large growth stocks that led in 2023 and 2024. While interest rates and inflation remain concerns, current inflation numbers largely exclude the impact of tariffs. Over the next two months, we’ll get a clearer picture of tariff effects.

The budget reconciliation package now in the Senate is also a concern. Non-partisan analysis warns of increasing deficits and debt over the bill’s 10-year span. The bill makes permanent most of the 2017 Tax Cut and Jobs Act provisions, which, along with COVID spending, have left us in a deep fiscal hole. Although the TCJA provided some growth stimulus, it fell far short of offsetting the tax cuts. COVID only worsened the fiscal strain. For more on how government spending debates continue to shape markets, see our earlier post: Government shutdown ahead? Not again!

Given today’s high interest rates, the potential for sustained inflation, and the likelihood that rates remain elevated, interest payments on the federal debt are projected to rise to 40% of the federal budget—surpassing spending on defense, Social Security, and Medicare/Medicaid. A sobering update: Social Security payments are now projected to be reduced by 21% starting in 2033, one year earlier than previously estimated. Medicare is forecasted to pay only 89% of benefits that same year.

The Federal Reserve’s June meeting resulted in no rate change but maintained expectations for two cuts later this year. However, uncertainty surrounding the budget bill, inflation, and tariffs remains high.

On the geopolitical front, the war between Israel and Iran adds further uncertainty. President Trump stated today he will decide within two weeks whether to formally involve the U.S. Markets remain nervous about the conflict spreading and impacting oil prices.

In July, the 89-day tariff relief window closes, with negotiations ongoing. So far, only framework agreements with the U.K. and China have been reached, with little detail. Time is running short to finalize 120 trade deals in the remaining 90-day period. Could this be another case of “TACO — Trump Always Chickens Out” Today brought yet another 90-day delay on resolving the TikTok legislation Congress passed last year.

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