10/14/2025
In a May 19, 2025 posting in www.georgeeconomics.com prior to the passing of the Big Beautiful Bill, “TRUMP’S SUPPLY SIDE POLICIES, THE KEYNESIAN FED AND THE STOCK MARKET”, (https://georgeeconomics.com/2025/05/19/trumps-supply-side-policies-the-keynesian-fed-and-the-stock-market/ I brought up the specter of a possible over bought stock market going into 2026, driven by the likely confluence of a number of economic and financial factors. Among those factors considered were a “Big Beautiful Bill” that an induced bull market reaction in anticipation of productivity increases and lower private sector operating cost due to slashed regulation and supply side tax policy sooner than these policies can accrue to the bottom line of corporate balance sheets, and a recalcitrant Fed slow walking the need of a lower target interest rate, thereby bunching up a number of needed rate cuts at the end of the year, overheating a typically anticipated “Santa Clause “rally.
At the present time (Columbus Day 2025 – 10/13/2025), Trump’s Big Beautiful Bill (hereafter BBB) was passed on July 4, 2025, with the Fed clinging onto an erroneous tariff-based argument to avoid cutting the target rate until their September open market meeting. Numerous financial and stock market experts anticipate two additional ¼ point interest rate reductions this year, which would result in the rate cuts occurring in close succession towards the year’s end. Note that there are only two more open market meetings this year (the end of October and December). The stock market has reached record high after record high over the summer and seems to be looking past most negative obstacles going forward. It would have been more appropriate for these projected rate cuts to occur during the summer rather than in December. Does this spell out a doom’s day scenario for the stock market going into 2026? Probably not, unless a fit of unfounded euphoria blinds most stock market participants.
Earnings season is upon us and strong earnings reports that support lofty valuations (i.e., earnings or other financial multiples) will go a long way to validate record or near record stock prices. Major banks are anticipated to deliver robust earnings, indicating a positive outlook for the sector. A mediocre or even a reasonably good earnings season may not be adequate to create confidence that there will not be a significant market correction early in 2026. The stock market is priced to perfection, and anything significantly less will leave the market vulnerable to high volatility in the case of even a minor negative event. The favorable regulatory and tax aspects of the BBB will translate into an expansion of the economy, lower inflation, and increased productivity. Some of the cost savings such as those attributable to the elimination of unnecessary regulation will show up quickly on the balance sheets of corporations and the pocketbooks of consumers. The substantial economic growth resulting from capital formation, as emphasized in the aforementioned legislation, is anticipated to progress at a gradual pace. However, its impact is projected to be greater than the short-term cost savings when assessed over the medium to long term.
The relevant question is whether the present economic environment, coupled with the short-term cost savings to be derived from the BBB will be adequate to support a possible over exuberant stock market rally into the end of 2025, without triggering a significant correction in Q1 of 2026. By the end of Q2 of 2026 the free market friendly aspects of the BBB will begin to have a bigger role in driving the overall economy and growth will be significantly greater than projected by the Keynesian gurus at the Federal Reserve and most of the rating agencies. Capital expenditure has remained strong and is expected to persist, indicating sustained growth prospects in the future. For this reason, any pullback in the stock market late in 2025 or in the first quarter of 2026 should be considered a buying opportunity that should not be missed.