Week That Was: Fiscal Fireworks, Fragile Markets
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It was a week marked by bold fiscal moves and rising global uncertainty. From the signing of the sweeping OBBB Act to heightened trade tensions and stretched market valuations, policy developments dominated headlines. While investors kept the rally going, risks beneath the surface grew harder to ignore.
OBBB Act Becomes Law
In a major legislative move, President Trump signed the “One Big Beautiful Bill” (OBBB Act) into law on July 4. The bill is sweeping, it extends 2017 tax cuts, boosts funding for ICE, slashes support for clean energy, and cuts Medicaid and SNAP benefits. Economists estimate the bill will add somewhere between $3 and $3.4 trillion to the federal debt over the next decade. Markets reacted with a mix of enthusiasm and caution. While equities touched new highs, bond yields climbed and the U.S. dollar softened, as concerns about inflation and long-term fiscal sustainability weighed on sentiment.
Valuations: Historically Stretched, But Retail Still Bidding
U.S. equities are undeniably expensive right now. The S&P 500 is trading around 22.7 times forward earnings, far above historical norms. Broader metrics like CAPE and EV/EBITDA also suggest frothy conditions. Yet, money keeps flowing in, largely from retail investors piling into ETFs and high-exposure tech plays, along with continued corporate buybacks. This dynamic is helping sustain the rally, even if it’s sitting on an increasingly shaky foundation. There’s clearly still a bid in this market, but the risk of volatility remains ever-present, especially as policy developments add to the uncertainty.
Trump’s Trade Moves
On the trade front, the administration has made some progress, albeit unevenly. There’s a framework deal with the UK, and in-principle agreements with Vietnam and China focusing on critical minerals and rare earths. However, major economies like India, Japan, and the EU have yet to reach firm agreements. Trump has continued his unconventional negotiating style, favoring letters over finalized deals. He’s warned of steep tariffs ranging from 10% to 70%, if countries don’t cooperate or come to terms soon.
Week Ahead: Deadline Diplomacy (July 9 Deadline & August 1 Tariffs)
A critical window is closing. July 9 marks the end of a 90 day pause that began on April 2, when Trump temporarily lifted reciprocal tariffs to allow time for negotiations. If no agreements or official letters are in place by then, a new wave of tariffs ranging from 70 percent is set to begin on August 1.
What to Watch This Week
Letter rollout
At Joint Base Andrews on Friday, it was announced by President Trump that beginning that day, 10 to 12 countries would be notified each day by the White House with new tariff letters.
The letters are expected to specify rates on a country-by-country basis, determined by each nation’s trade posture.
It was further confirmed that in most cases, the new tariffs would take effect on August 1.
Country responses
Key trade partners like Canada, India, Japan, South Korea, and EU nations are now under increasing pressure to finalize agreements. US officials have indicated that countries actively negotiating may receive more favorable treatment with lower tariff rates. On the other hand, those seen as dragging their feet or resisting talks could be hit with the highest rates, possibly between 50 and 70 percent.
Market volatility risk
Markets have staged an impressive rally since the April tariff shock, with the S&P 500 climbing around 25 percent. This rebound has been driven largely by retail investment and stock buybacks. But volatility remains a lurking threat. With valuations still elevated and investor sentiment potentially fragile, any unexpected negative news could lead to a sharp correction.
Deal potential
There is still room for optimism. Trump and his team have suggested that several agreements are close, even if some only amount to mini-deals or provisional frameworks. Where full negotiations have not wrapped up, the administration is prepared to move forward with letters. At this point, the UK and Vietnam have signed on, while discussions with India, Japan, and the European Union are still in play.
Conclusion
While markets appear calm and continue to rally on retail inflows, corporate buybacks, and hopes of fiscal driven growth, the underlying risks are intensifying. The Trump administration’s aggressive trade posture centered on tariff threats up to 70 percent has injected a new layer of uncertainty. With the July 9 deadline fast approaching and many key trading partners like Canada, Mexico, the EU, Japan, India, and South Korea still lacking finalized agreements, the coming days will be pivotal. Should the administration fail to secure enough deals and proceed with broad based tariff rollouts, markets could quickly shift from complacency to volatility. For now, investors are betting on diplomacy, but that bet could be tested sharply if negotiations break down.
