Big, beautiful boost - the week ahead

As we enter the second half of the year, the investment glass is half full. Pulled two ways by a big, beautiful tax boost on the one hand and tariff fears on the other, investors have decided that net, net everything’s going to be just fine.

Another day, another new high

The US stock market’s V-shaped recovery since the short-lived February to April bear market continues apace. The S&P 500 index went into the Independence Day holiday last week at a new all-time high. And the rally has now outpaced and outdistanced even the two biggest recent market recoveries in 1998 and 2020.

Investors have focused on the positives from last week’s Congressional approval of Donald Trump’s Big, Beautiful tax bill. It promises to keep spending high and taxes low for the foreseeable future and that’s seen to be good for growth. The fact that it adds at least $3trn to government debts over the next few years is viewed as tomorrow’s problem.

Investors are also taking in their stride fears about the end of the 90-day pause to the liberation day tariffs. A big hike in import levies caused a market stir in early April and immediately prompted the announcement of a three-month negotiating window, which runs out on Wednesday.

As it stands, progress towards deals that might forestall punishing tariffs looks thin on the ground. Partial deals with the UK, China and Vietnam leave many important trading partners - such as Japan, the EU and South Korea - without a deal. The White House has this week ratcheted up the rhetoric on tariffs, warning the Brics countries - Brazil, Russia, India, China and South Africa - that they face higher tariffs if they implement ‘anti-American’ policies.

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Earnings season

That’s the backdrop to the imminent arrival of second quarter earnings season. And the next batch of results announcements is seen as key because it will give a first clue as to the impact of tariff concerns. Forecasts have been reined in over recent weeks as business and consumer confidence has taken a hit from erratic trade policy.

As it stands, earnings are forecast to rise by less than 3% year on year. Earnings season usually sees positive revisions as better than expected numbers are delivered. So, there’s still a reasonable hope that the long-term average of about 7% growth can be achieved again.

Arguably it will need to be, because the recent rally in share prices has pushed valuations up to stretched levels once again. In the case of the expensive US market, they have bounced back to about 24 times expected earnings. In the face of renewed tariffs concerns that looks punchy.

Meanwhile, closer to home

Fiscal concerns are not an exclusively US issue. Here, too, worries about the balance between tax revenues and spending plans are in focus. And last week’s climb down on proposed welfare cuts by a divided government showed how difficult balancing the books can be.

Unable to persuade its back benchers of the merits of lower spending on the most vulnerable, the government is scrambling around for revenues wherever it can find them. One high-profile target this week is the cash ISA, with the Chancellor widely expected to cut the generous £20,000 contribution limit for this popular savings vehicle. The stated aim is to divert funds into more productive stock market investments. But it’s a controversial measure that could be yet another unpopular move by a struggling, one-year old administration.

• Read: Cash ISAs: the real challenge for savers
• Read: How to make cash-like returns - without a cash ISA

On the radar this week

As we move into the traditional summer lull, there’s not a lot other than tariffs to focus on. There’s a GDP estimate for the UK on Friday and an interest rate decision in Australia. Other than a handful of trading statements, that’s about it.

Read:

• Why you shouldn’t turn your back on the US
• Top 10 best-selling ISA and SIPP funds this year
• Investing in emerging markets - three fund picks

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.