Stocks have been buffeted by tariff headlines over the past month, sending the S&P 500 (^GSPC) into correction as it tumbled 10% from a record high in February.
Much of the rude awakening for stocks came as market participants realized that the pro-growth policies they were expecting from the Trump administration, including tax cuts and deregulation, would come after tariffs.
After a drop in stocks, a surge in volatility, and a flight to assets like Treasurys and gold, strategists now say not getting an extension of tax cuts could spell disaster for the economy and for equities.
“The risk premium would have to increase,” José Torres, senior economist at Interactive Brokers, told Yahoo Finance in an interview. “You’d have to see significant earnings prowess to withstand that kind of environment. In fact, if you don’t have relief on the taxation front or relief on the trade front, we’re probably going to have a significant slowdown this year, probably down to 1% on GDP, could possibly go negative.”
The Tax Cuts and Jobs Act passed in 2017 and became effective in 2018. It cut tax rates for individuals through the end of this year and permanently for corporations. President Trump has said he wants to extend the individual cuts and push for additional ones, including removing taxes on tips and overtime and a reduction for businesses below the current 21%.
Investors seem to expect both an extension and the additions the president has touted, and after what many have termed a “sequencing” problem of tariff vegetables before tax-cut dessert, they want it done as soon as possible.
“Quite clearly, if we don’t see the policy implementation by midyear, that could potentially slow down the economy much more,” said Anne Walsh, chief investment officer of Guggenheim Partners Investment Management, in an interview with Yahoo Finance. “Right now our base case is for, we’ll call it 1.8-ish on real GDP. Trend line GDP in the US is around 2%. So if we fall below that, then we get the slowing effect.”
Henrietta Treyz, managing partner and director of economic policy at Veda Partners, said she doesn’t see additional cuts coming. In an interview, she highlighted an obscure accounting gimmick the GOP is trying to employ, the current account baseline, which would make it appear as though a tax-cut extension costs nothing.
“I think that’s a really important message that is being missed by the markets right now,” Treyz said. “There are no tax cuts. There is an extension of the status quo. And that’s, in fact, the entire argument behind Treasury Secretary Scott Bessent and Howard Lutnick and President Trump and Republicans on the Senate side saying, we’re actually not stimulating the economy at all. We’re not spending any new money. So let’s use the current policy baseline. This doesn’t cost anything. That is de facto an admission that the bill they’re working on is not a tax cut.”
