JULY 7, 2025
It was a historic quarter, given the elevated market volatility due to political factors that affected the economy and markets, with an intensity we have not seen in a long time. The S&P 500 climbed an astounding 24.5% from the lows on April 8th to the end of the quarter.
As we stated in our last quarterly letter, we were concerned with the magnitude of the early tariff proclamations and how they would affect our economy and corporate earnings. We saw the administration ultimately defer action and negotiate; a collective breath was felt.
However, stock valuations remain elevated with the S&P 500’s forward price-to-earnings ratio reaching 23.7x at quarter-end, roughly where we started the year. This figure suggesting that investors continue to place faith in the durability of the U.S. economy, despite increasing political drama and global uncertainty.
Now that U.S. lawmakers have narrowly approved President Trump’s One Big Beautiful Bill Act, investors are turning their attention to the impact that the massive tax and spending bill could have on the U.S. economy and financial markets.
Among many other provisions, the bill permanently extends the tax rates initially adopted as part of the 2017 TCJA, reduces taxes on tips and overtime pay, and makes deep cuts to Medicaid, food assistance and other social safety-net programs.
The tax cuts contained in this bill should be modestly supportive of U.S. economic growth this year and next. However, whether the fiscal stimulus makes up for any headwinds created by a tariff-fueled trade war remains to be seen.
For investors, rising U.S. deficits could mean higher interest rates down the road as the federal government must sell more Treasury securities, while buyers might be slightly more reluctant to purchase them. Higher deficits may also result in a steepening of the yield curve; that is, a widening of the gap between short-term and long-term interest rates.
Over the past quarter, bond yields in the 18 months to 7-year range have trended lower, from 10 – 25bp, in anticipation of a Fed cut or cuts that have failed to appear. Investment grade – quality structured new issuance has been light indicating that there may be lower yields down the road.
The Fed continues to be data driven with its decision making. Employment and jobless numbers over the quarter, and the first half of the year, were very consistent. Inflation, while higher than the Fed’s target, has been trending downward this quarter.
If the Fed cuts rates in 2025, doing so at the July meeting would be somewhat surprising; and may be more likely in September or December, which would give them more time to determine the health of the economy.
We are carefully evaluating the challenges that lie ahead, from geopolitical risks and inflationary pressures to shifting consumer dynamics and supply chain realignments. Yet, we continue to believe in the strength of the U.S. economy as a driver of global growth. That said, political notions can cloud visibility, and we are prepared for near-term disruptions even as we look toward long-term opportunity.
Our equity portfolios remain focused on high-quality businesses with durable competitive advantages and resilient cash flows. We are prepared to prune holdings as valuations become stretched and will opportunistically harvest gains when appropriate, always with a view toward each client’s individual tax situation and risk profile.
Planning Insight
What the One Big Beautiful Bill Act (OBBB) means for our clients: For business owner clients seeking to optimize their tax strategies, the OBBB presents a range of valuable opportunities. Business owners with substantial assets can leverage accelerated deductions through bonus depreciation and Section 179, while pass-through business owners benefit from the permanent Qualified Business Income (QBI) deduction and the ability to defer losses under the extended Excess Business Loss (EBL) Limitation rules.
The bill also provides State and Local Tax (SALT) deduction cap relief, increasing the limit to $40,000 for households with an adjusted gross income (AGI) under $500,000—though this change reverts after 2029. For high-net-worth clients, the estate and gift tax exemption has doubled to $15 million per individual ($30 million per couple), with the exemption now indexed for inflation and made permanent. Additionally, the bill expands to 529 plan qualified expenses, allowing up to $20,000 per year for K-12 education and credential programs.
From an investment standpoint, provisions like the Low-Income Housing Tax Credit (LIHTC) and New Markets Tax Credit provide new avenues for impact investing, while clients with global exposure should be mindful of the foreign tax surcharge introduced under Section 899. For small business owners, the raised 1099-K reporting threshold offers simplified administration by reducing the number of required filings.
If you would like to discuss how the OBBB impacts your personal financial planning, feel free to reach out to us.
Firm Update
We remain committed to full transparency regarding the transition of ownership at Nicollet. The equity group of partners, made up of current Nicollet employees, continue to work with Mark Hoonsbeen’s estate to purchase the business.
Also, we are moving forward with a major systems upgrade that will enhance our service and streamline reporting and communication. Investing in our infrastructure to ensure the highest level of service for years to some is a priority for our firm.
We wish you all the best and hope you have a great summer.
As always, our very best,
The Team at Nicollet Investment Management
