🦔 Welcome back to another week of cutting through the market noise! The S&P 500 closed at 6,260 last week, down just 0.3% despite a massive tax bill becoming law and tariffs hitting over 20 countries. When markets barely react to policy changes this big, it tells us something important about investor psychology right now.

The August 1 tariff deadline is now locked in stone, the biggest tax legislation since 2017 just passed, and inflation data this week could determine whether the Fed cuts rates anytime soon. Let me break down what's really happening beneath the market's calm surface.

The One Big Beautiful Bill Act became law on July 4th, and the numbers are staggering. This isn't just extending existing tax cuts. It's adding entirely new deductions while cutting spending in targeted areas.

What actually changed: Tax deductions for tips, overtime pay, and Social Security benefits got added to the mix. The SALT deduction cap jumped from $10,000 to $40,000 (phasing out at $500,000 income). Most importantly, 100% bonus depreciation returned after stepping down to 40% this year, giving businesses immediate write-offs for equipment purchases.

The fiscal math: Tax cuts reduce government revenue by $4.5 trillion over the next decade. Spending cuts through work requirements and program eliminations save $1.2 trillion. Net result: deficits increase by $3.3 trillion through 2034. That's real money that will need to be financed through more Treasury debt issuance.

Why markets didn't celebrate: Most of the tax relief goes to higher-income households who tend to save rather than spend windfalls. Plus, extending existing tax rates doesn't create new economic activity. It just prevents a tax increase that was already scheduled. The real economic boost comes from business investment incentives, which take time to work through the system.

The 2026-2027 acceleration: Combined with deregulation efforts and eventual Fed rate cuts, this fiscal package sets up potential economic reacceleration in 2026-2027. But it comes at the cost of much higher deficits that will pressure bond markets and limit future fiscal flexibility.

Over 20 countries got their final tariff notices this week, with rates ranging from 20% to 50% starting August 1st. The administration extended the deadline once more, but this time with an absolute cutoff.

The rate breakdown: Brazil faces 50% tariffs (up from 10%), partly due to legal proceedings against former president Bolsonaro. Canada gets 35% (up from 25%), though most goods under USMCA remain exempt. Most other countries face 15-20% rates. These aren't negotiating positions anymore. They're final ultimatums.

What Vietnam and UK deals show: Vietnam negotiated down from 46% to 20%. The UK previously secured 10% rates. Both deals show flexibility exists, but you need to offer something concrete in return. Countries that can't cut deals face the full rates.

The inflation timeline: Companies have absorbed tariff costs through inventory stockpiling and margin compression so far. But profit margins aren't deep enough to absorb 20-50% tariffs indefinitely. Expect price increases to start showing up in consumer goods over the next 3-6 months as inventory buffers get exhausted.

Fed implications: Tariffs create stagflation risk (slower growth + higher inflation), putting the Fed in an impossible position. They can't cut rates to support growth if trade measures are simultaneously boosting prices. This pushes rate cuts further into fall 2025 at the earliest.

The market's muted reaction to major policy changes signals either remarkable adaptation or dangerous complacency.

The sector rotation continues: Energy jumped 4.0% this week after being the worst first-half performer. Industrials gained 1.6%. Meanwhile, communication services fell 1.0%, flipping from first-half winner to current laggard. This rotation from growth to value sectors often happens when investors think the easy gains are over.

International vs domestic dynamics: MSCI EAFE sits at 2,654, up 17.1% year-to-date compared to the S&P's 6.4%. The dollar's weakness earlier this year drove international outperformance, but that tailwind may be fading as U.S. economic data stays resilient.

Bond market signals: The 10-year Treasury yield edged up to 4.42% this week. That's still below January levels despite massive fiscal expansion and tariff uncertainty. Bond investors seem comfortable that either growth will slow enough to justify Fed cuts, or inflation will stay contained enough to keep real rates attractive.

This week brings critical inflation numbers that could reshape Fed expectations and market positioning.

Inflation as the key catalyst: With tariffs set to boost prices and fiscal policy providing stimulus, inflation data becomes crucial. If June CPI comes in hot, it kills any remaining hope for summer rate cuts and potentially pushes the first cut into 2026.

Retail sales and consumer strength: Consumer spending data will show whether households are still willing to spend despite higher prices and borrowing costs. The tax bill provides some support, but most benefits don't kick in until tax filing season.

The Fed's dilemma deepens: Every piece of data now gets viewed through the tariff lens. Strong growth? Can't cut rates because tariffs might boost inflation. Weak growth? Can't cut rates because tariffs are already providing stimulus. The central bank is increasingly boxed in by trade policy.

Markets have learned to look past policy announcements because extensions and modifications have been common. This adaptation works until it doesn't.

The August 1 test: Unlike previous deadlines, this one appears firm. No more extensions, no more negotiations. Either countries have deals by August 1st, or they face the full tariff rates. This binary outcome creates genuine uncertainty that markets haven't fully priced in.

The deficit elephant: Adding $3.3 trillion to deficits over the next decade during a period of already-high government debt isn't getting enough attention. At some point, bond investors will demand higher yields to compensate for increased fiscal risk. When that happens, it affects everything from mortgage rates to corporate borrowing costs.

Positioning for divergence: The combination of fiscal stimulus, tariff uncertainty, and Fed paralysis creates unusual cross-currents. Some sectors will benefit from domestic spending and reshoring trends. Others will get crushed by input cost inflation and trade disruption.

What to watch:

The market's calm assumes policy impacts will be manageable and economic fundamentals will prevail. That's been the right bet so far, but August 1st will test whether this assumption holds when tariffs actually get implemented rather than just threatened.

Economic policy has consequences. Sometimes those consequences take time to materialize, and sometimes markets ignore them until they can't. We're about to find out which category these policies fall into.

Until next week,

🦔 Hedgie

^{DISCLAIMER: For educational purposes only. I'm a hedgehog who types with tiny paws, not a licensed financial advisor (my only certifications are in "Burrow Construction" and "Quill Maintenance"). Investments involve risk, sometimes as prickly as my back. Do your own research or consult with a human financial professional, as taking investment advice from woodland creatures, no matter how financially literate, is generally not recommended by the SEC.}