The July 4th passage of the One Big Beautiful Bill Act (OBBBA), a stable economy characterized by moderate GDP and low unemployment, evolving Federal Reserve policy, and record cash on the sidelines provide fundamental tailwinds that remain supportive for the stock market. Indeed, the S&P 500, Dow Jones Industrial Average and NASDAQ Composite have rallied 13.72%, 9.06% and 17.34% respectively as we enter the fourth quarter. The quarters ahead will test whether fiscal and monetary stimulus, rapid technological innovation, and reshoring of US manufacturing capacity can offset the weight of high equity valuations.
OBBBA is more than a tax package – it’s a multi-year stimulant for economic activity. The individual and corporate tax benefits passed by the 2017 Tax Cuts and Jobs Act (TCJA) are now permanent, 100% bonus depreciation for qualified property purchased after January 19this permanently restored, the maximum deduction threshold for Section 179 immediate expensing has been doubled to $2.5 million, and expenses for domestic research and experimentation are now fully deductible. New temporary deductions were created for qualified tips, overtime pay, and interest on auto loans for US assembled vehicles. Meanwhile, the estate tax exemption has been lifted to $15 million per person ($30 million per married couple) effective January 2026 and will be indexed to inflation starting 2027. Together, these measures should encourage investment, bolster consumption, and provide stimulus for consumers and corporations alike.
At the same time, the labor market is showing signs of strain. The Bureau of Labor Statistics recently reported that payroll gains for the 12 months ending in March were overstated by 911,000 jobs, a revision that cuts the estimated monthly job creation from 147,000 to 70,000, a stunning reduction of more than half. This marks the worst downward revision since 2000 and highlights a cooling labor market. In addition, the ADP National Employment Report revealed 32,000 private sector jobs lost in September instead of the 50,000 job gains expected. Yet the full story may be more complex due to shifting labor dynamics. Unauthorized immigration, which spiked by 3.5 million over a two-year period to a 2023 peak of 14 million, is declining and the overall US immigrant population shrunk over the first six months of the year by 2.6% to 51.9 million, the first decline in US immigrant population since the 1960s. Meanwhile, roughly 10,000 Baby Boomers are retiring every day, with “Peak 65” occurring between 2024 and 2027 as our largest generation ages into retirement. These structural shifts reduce the breakeven point for job growth, meaning even modest monthly payroll gains may be sufficient to keep unemployment steady. Despite these mixed signals, real GDP rose by 3.8% in the second quarter and is expected to increase by just under 2% for all of 2025.
Inflation remains stubborn but manageable. Core Personal Consumption Expenditures (Core PCE), the Fed’s preferred inflation gauge, rose at a 2.9% annualized rate in August. That is above the Fed’s 2% target but aligned with forecasts, offering reassurance that tariffs have not triggered an unexpected inflation surge. This allowed the Federal Reserve to resume policy easing, cutting the federal funds rate by a quarter point in September to a range of 4.0% to 4.25%. Policymakers signaled a “shift in the balance of risks,” indicating they will lean toward protecting the labor market rather than tightening further against potential inflation. Fed funds futures suggest rates could fall toward 3% by the end of 2026. While that may prove optimistic, the direction is clearly lower, which is stimulative for growth.
Tariffs are also reshaping the economic landscape. Revenues from tariffs are on pace to annualize at $350 billion this year – approximately equivalent to 15% of federal income tax receipts. If inflationary pressures remain transitory and if legal uncertainties are removed, tariffs could become a meaningful and sustainable revenue source for the U.S. Treasury. Concurrently, the Trump administration is pursuing a $550 billion investment fund created through trade negotiations with Japan aimed at reviving U.S. manufacturing and infrastructure. Priority areas include semiconductors, pharmaceuticals, critical minerals, energy, shipping, and quantum computing. If implemented effectively, these investments could lay the groundwork for significant job creation and a revitalized American industrial base.
Meanwhile, investors remain flush with cash. Money market funds now hold a record $7.7 trillion. As interest rates fall, the relative attractiveness of cash will diminish, likely fueling a shift into equities and other risk assets. This suggests a heightened readiness among investors to “buy the dip,” adding liquidity and support to markets.
Still, equity valuations present a meaningful challenge. With a forward PE ratio near 23, the S&P 500 trades well above historical norms. While much of the good news may already be priced in, especially in certain sectors and companies, there are ample catalysts to support stock prices. Fiscal stimulus from OBBBA, monetary easing from the Fed, reshoring of manufacturing capacity and new industrial investment, and rapid technological advances in artificial intelligence and robotics all provide potential upside for corporate productivity and profitability in the years ahead. These factors could extend the current economic cycle further than many anticipate.
Since the onset of the global pandemic in March 2020, the stock market has suffered three material bear market declines north of 20% (2020, 2022 and 2025). According to Morgan Stanley’s well-known Chief Investment Strategist Mike Wilson, April 2025 marked the end of a major bear market, and we are now in the early stages of a new bull market with “rolling recoveries” to be expected. Wilson believes that breadth will widen as the Federal Reserve plays catch up to market expectations. Testament to this theory, the stock market is hyper-concentrated in Mag 7 technology and AI companies that were able to deliver significant earnings growth during an otherwise difficult rolling recession over the last few years. As the economic catalysts discussed take greater shape and Fed policy becomes more accommodative, the stock market advance should finally broaden out.
We are entering a period defined by contrasts: slowing job growth but a shrinking labor pool, sticky inflation but falling interest rates, high valuations but unprecedented cash reserves, tariffs as both a consumer tax and a revenue lifeline. For investors, the path forward requires patience, discipline, and a clear understanding of how these competing forces interact. The next chapter of the U.S. economy and stock market will be written at the intersection of fiscal and monetary policy, shifting demographics, and technological innovation on par with history’s great industrial revolutions. For now, the wind is still at the economy’s back – even if the waters seem unsettled.