Key Takeaways from Strategas Research Areas

Washington Policy

Dan Clifton, Head of Policy Research

Trump’s Casino. President Trump went all in on trade, proposing over $600 billion in tariffs with the hope that others (e.g., the Fed, Congress, China) would adjust their policies to sterilize the tariffs. We are starting to see this play out with Trump reducing his tariffs by more than $400 billion in the last 30 days, Congress moving a tax bill, negotiations with other countries gaining steam, and a potential Iran deal. The goal seems to be lower oil prices to drive down inflation and give the Fed space to cut rates, while incentivizing reshoring through lower taxes on business investment. We expect a 10% universal tariff, sectoral tariffs, 30% tariffs on China, and commodity tariffs to remain in place.

Liquidity Bazooka. Since the US hit the debt ceiling Jan. 21, the Treasury cannot issue net new debt. To pay the country’s bills, Treasury is spending down its Treasury General Account, which provides liquidity into the banking system and loosens financial conditions. Bond yields came down in Q1 when liquidity was plentiful (and went up in April when liquidity was temporarily drained by Tax Day). Trade policy may have enhanced the speed at which yields rose, but the level of yields was consistent with the liquidity drain. This is important because $250 billion of new liquidity will be hitting financial markets over the next two weeks, giving a cushion to Congress as they debate the tax bill.

Tax Bill Looms. Congress is moving forward with its tax bill which will front load business investment to sterilize the negative impact of tariffs. The legislation incentivizes new business development through 100% expensing of factories, capital goods, and research and development (R&D). Also, more than $100 billion in incremental tax relief is delivered to consumers in 2026 through a higher standard deduction, child tax credit, small business deduction, and senior tax deduction. Combined, business and consumer aid should boost GDP by 1%, helping to sterilize the negative impact of tariffs (which have come down meaningfully on their own). The legislation will also privatize the student loan system, remove $600 billion of renewable energy spending over 10 years, and slow the growth of Medicaid spending.

Asset Allocation

Nicholas Bohnsack, President, Head of Portfolio Strategy

2Q25 is a “broken play.” We would not be inclined to respond too optimistically to positive short-term developments nor be too pessimistic over negative developments. All in (trade policy shifts, Fed uncertainty, corporate caution, and tax/debt ceiling uncertainty), too many variables whose direction are still unknown to draw inference from 2Q results.

The character of this bull run has changed. Growth has overtaken inflationary pressures as the chief market concern. We remain Neutral on Equities from a modest overweight late last year. We remain generally suspicious of Big Tech reemerging on the “other side” of this period, as enthusiasm around A.I. begins shifting away from infrastructure and compute capacity toward more agentic and contextual application use cases.

Overweight International. We maintain an increased exposure (within a smaller Equity envelope) to Developed International shares. Global earnings need to continue to hold-up to justify positioning, but valuation spreads and macro policy differentials present more attractive near-term opportunities. The insistence of the U.S. to enforce NATO defense spending covenants should catalyze a defense-tech and innovation wave. We remain very selective in Emerging Markets.

Gold. We believe market conditions warrant higher long-term allocation to Gold. The entry point has improved in recent weeks and could improve further (though our technical team remains skeptical of the yellow metal in the short-term). Over the longer term we maintain Gold is likely to serve as both a core allocation in this accelerated phase of de-globalization, as well as a transition asset during a period of heightened uncertainty and central bank balance sheet distortion.

Fixed Income

Tom Tzitzouris, Head of Fixed Income Research

Soft landing vs. recession. We believe it’s too early to call the all-clear on recession, but clearly the news of a reprieve on tariffs and potential for verbal trade agreements is positive for the economy. That’s unambiguously good for corporate credit as well, at least compared to where we stood back on April 2, but it’s not entirely clear that it’s a positive for Treasuries. A recession, especially one with rising tax revenue from tariffs, would have likely proven to be a strong one-two punch for Treasuries and pushed yields notably lower, forcing the Fed to ease aggressively. So, the emerging trade backdrop is a little less optimistic for Treasuries, in light of lower tariffs.

Trade. This idea that lower tariffs will be bad for Treasuries, eventually, is not a novel idea; after all, a weaker economy is always positive for safe haven debt. But the world is starting to question whether Treasuries are still a safe haven. We believe Treasuries will still serve their natural role as the global “go-to asset” in times of stress – tariffs won’t change that – but the level of demand will be lower. More precisely, there’s an unavoidable truth that a lower trade deficit means less liquidity in circulation that can come back to Treasuries in times of stress. This is not a reflection on the dollar or U.S. government as a source of stability, rather a reality of a lower trade deficit.

Treasuries. This side effect of lower trade deficits leading to less capital flows into the U.S. is especially problematic because the Fed seems intent to “hold until something breaks.” Add to that the fact that major trade partners/allies, like Japan and Germany, are looking to finance increased military spending with long duration government bonds. This means even less cash floating around to buy Treasuries, but, again, doesn’t mean a less favorable view of Treasuries as a safe haven asset class during times of market stress.

The Fed. We see the Central Bank easing at least 50 basis points (i.e., two 0.25% cuts) this year, and still a close to 50-50 chance of a third 25 basis point (bp) cut later in 2025. But the 100 bps rate cut outlook for 2025 seems off the table, for now. This should be good enough to eventually push 10-year yields down to about 4.00%, and possibly a little lower, but to push back down to the 3.50% zone is going to require a recession and more Fed easing.

Spreads. Credit spreads (i.e., how much a corporate bond yields above a Treasury of similar duration – a measure of corporate health) should be well-behaved until the labor market starts to wobble, but even then, we don’t expect to see any material move above the 120 bps level for investment grade corporates until earnings weakness becomes inevitable, which may not happen until early Q3 at this pace. High yield spreads should again see more pain than investment grade, in part because high yield spreads have compressed aggressively and are back down to levels that are not consistent even with slower growth, let alone a recession.

Growth. Once growth begins to stabilize, and Fed easing has stalled, we expect to see yet another round of painful bear market Treasury steepening before the year is over (i.e., a widening of the yield curve caused by long-term interest rates increasing at a faster rate than short-term rates) with this continuing well into 2026 as growth pushes back towards the 2.25% potential.