The White House has been obsessed with tariffs. Wall Street is wondering about Trump’s tax cuts

By John Towfighi, CNN

New York (CNN) — As the US and China came to an agreement to lower tariffs sharply this week, trade war uncertainty has, for now, subsided. But Wall Street has a new question for President Donald Trump: What about tax cuts?

Lawmakers this week are debating Trump’s tax agenda, which includes extending the 2017 Tax Cuts and Jobs Act and adding potential tax cuts on tips, overtime pay and Social Security. That “big, beautiful bill” could have, well, big implications for the economy — and for stocks and bonds.

A lower tax burden could could mean more money for consumers, the engine of the economy, to splash out at stores, in addition to providing a boost to Wall Street. But Trump’s tax cuts could also increase the deficit, and investors might demand higher interest rates to hold US debt.

Alan Auerbach, a professor of economics at UC Berkeley, told CNN that he thinks investors could balk if the tax bill lowers taxes without cuts to government spending as well.

“I think there may still be some belief in markets that there’s going to be large spending cuts, and I think when they find out there really aren’t, that might have some impact,” he said.

While many investors have been enthusiastic about potential tax cuts, concerns about the federal debt have also increased substantially since 2017, when Trump’s first tax cuts were passed, Auerbach said.

The ratio of federal debt to gross domestic product, or the total value of goods and services produced in the economy, was 123% in 2024, up from 104% in 2017, according to the Treasury Department. A higher debt-to-GDP ratio signals the government might have “greater difficulty in repaying its debt,” according to Treasury Department.

“We’re now talking about deficits and a national debt-to-GDP ratio that are really going to be unprecedented, except for recent recessionary times,” Auerbach said.

While Trump is set on extending his tax cuts, there just aren’t that many places in the federal budget to cut spending, he said.

Volatility has settled this month as Trump walked back his most aggressive tariff policies. As the focus turns to tax cuts, which Republicans hope to sign into law this summer, investors will be keen to see whether the president’s tax agenda provides a boost to markets or shakes confidence in US assets.

Bond market as a signal

Investors’ ire (or joy) could come out in the bond market, Sam Stovall, chief investment strategist at CFRA Research, told CNN.

“I think we have to watch closely the bond market, because it will give us a signal as to whether it dislikes whatever Trump does with taxes,” Stovall said.

Trump’s tariff chaos spooked markets deeply last month, making investors nervous about US assets. As a result, the yield on the 10-year US Treasury note rose about 50 basis points the week ending April 11, according to analysts at JPMorgan Chase. That was the largest weekly increase since 2001, they said.

US Treasuries have typically been considered a safe haven and the best kind of place to park your cash during tough times. But the ongoing worries about the deficit could keep Treasuries volatile, the JPMorgan Chase analysts wrote, or at least give investors pause about holding long-term US debt.

A March report by the Committee for a Responsible Federal Budget said Trump’s proposed tax cuts would add to the federal debt, which the report said is already on an unsustainable path.

“They (lawmakers) should not add further to the debt by enacting or extending tax cuts and spending without offsets,” the report said. “Doing so could spark a debt spiral and impose significant costs on current and future generations.”

For now, investors are largely waiting to see what happens, said Chip Hughey, managing director for fixed income at Truist Advisory Services.

“It is still too early to tell what the ultimate impact the final tax bill will have on the US Treasury market,” Hughey said.

Republicans still have plenty to work out in the tax bill, Berkeley’s Auerbach pointed out. Not all the proposed changes are likely to make it in.

Waiting for tax cuts

While Capitol Hill and Wall Street begin to think more about tax cuts, the worries about tariffs haven’t entirely gone away, either.

Tariff rates still remain substantially higher than before Trump took office, and investors are waiting for more economic data to see how American consumers are faring, Tom Hainlin, national investment strategist at US Bank Wealth Management Group, told CNN.

More trade agreements could be coming, and the frameworks of the deals announced so far still need to be fleshed out, Hainlin said.

“I think perhaps going into the year, there was a hope that there would be more of a clearly defined sequence, and not this sort of parallel processing of all of these initiatives at once,” Hainlin said.

The lack of a “clearly defined sequence” means that, at least for now, the path for the US economy remains particularly unclear.

“Even with the trade deal with China and suspension of reciprocal tariffs against other trade partners, tariffs remain a substantial headwind for the US economy,” David Doyle, head of economics at Macquarie, said in a Tuesday note. “While a positive development, the de-escalation does not mean that everything is ‘all clear’ on the trade war front.”

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