Markets are increasingly calling for tax cuts as a critical measure to stabilize and stimulate the economy amidst recent volatility driven by tariff concerns. The S&P 500 has entered a correction phase, dropping 10% from its February peak, largely due to market participants’ realization that anticipated pro-growth policies, such as tax cuts and deregulation from the Trump administration, would follow tariff implementations.
Strategists warn that failing to extend tax cuts could lead to economic disaster and further equity market declines. José Torres, senior economist at Interactive Brokers, notes that without tax or trade relief, GDP growth could slow significantly, potentially dropping to 1% or even turning negative.
The Tax Cuts and Jobs Act, enacted in 2017, reduced tax rates for individuals temporarily and for corporations permanently. President Trump has expressed intentions to extend individual tax cuts and introduce additional reductions, including eliminating taxes on tips and overtime, and lowering the corporate tax rate further.
Investors are anticipating both the extension of current tax cuts and the proposed additional reductions. Anne Walsh, chief investment officer of Guggenheim Partners Investment Management, emphasizes the urgency, stating that without policy implementation by midyear, the economy could slow more than expected, potentially falling below the 2% trend line GDP.
Henrietta Treyz, managing partner at Veda Partners, argues that the GOP’s proposed extension of the status quo, using an accounting gimmick known as the current account baseline, does not constitute a true tax cut. This approach suggests that the extension would not stimulate the economy, contrary to market expectations.
Investors remain hopeful for stimulative measures, whether through tax cut extensions or new reductions, to provide a much-needed economic tailwind. Gargi Chaudhuri, chief investment and portfolio strategist, believes that if these expectations are dashed, further market volatility could ensue.
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