Equity markets have breathed a sigh of relief over the ceasefire between Israel and Iran following the 12-day war. We’ve even had a record high for the Nasdaq 100 as investors bought back into tech, with Nvidia also hitting a new all-time high, while the gains for megacap names lifted the S&P 500 closer to its all-time high.

So is it time to scale new highs, or are there still big risks on the horizon that will encourage more volatility. I think we’ve got complacent despite being past peak fear on many fronts – and soon we will talking about tariffs and tax again just as we head into a seasonally weaker time for the market. This could see risk appetite stall as we head into the summer.

Geopolitics has maybe taken investors’ eyes off the ball in terms of tax and trade. Key deadlines loom for both. Meanwhile Donald Trump has threatened to name Fed chair Jay Powell’s successor as early as September, creating in effect a ‘shadow’ Fed chair which could seriously undermine policymaking and the transmission to markets.

In short, while markets are looking through the dangers right now it's worth just highlighting the milking stool of policy uncertainty with the three legs of trade, fiscal and monetary policy looking precarious as we head into July.

The Tariff Situation

From July 9, countries without a bilateral trade deal with the US will face “Liberation Day” tariffs which are much higher than the current baseline 10% level.

Running parallel to this China has a truce running through to mid-August on much higher tariffs.

Donald Trump secured a skinny trade deal with the UK but the pressure is on for countries, particularly the EU, Korea, India and Japan, to secure agreements by July 9th.

The European Union is planning to retaliate even if the US imposes only the 10% baseline levy on its goods. This implies a chance of re-escalation that would lead to further uncertainty that the markets would not like.

Bottom line: Does Trump extend the pause beyond July 9th? Markets seem to be assuming Trump chickens out again, but that could be a misplaced sense of confidence. Countries in ‘productive’ talks could see the deadline extended, but that leaves many more who could face the US unilaterally setting a tariff rate. The EU negotiatons are going to be key.

The Tax Bill Situation

The One Big Beautiful Bill Act – Trump's signature tax-cutting bill, passed the House of Representatives but is now facing a Senate vote, which could come as early as Friday to meet a self-imposed July 4th deadline.

The bill will extend 2017 tax breaks worth about $3.7 trillion but it’s the inclusion of massive spending cuts on government programmes like Medicaid and SNAP food stamps that is making its passage through the Senate trickier. It’s also as a reminder going to cut EV tax credits and ramp up spending for defence and homeland security.

The bill has several implications

Passing it will raise the debt, which ought to show up in Treasury markets – it's unclear whether this is fully discounted...I find it hard to believe that it is. Looking to see if and when the 30yr crosses 5% again.

Massive tax cuts are seen as pro-growth and good for animal spirits as they were when first introduced in 2017. Is this one reason why the stock market is near all-time highs?

Different sectors are impacted differently – broadly speaking the bill is good for defence and cybersecurity, bad for renewables, EVs, and healthcare.

The Fed Situation

Completing the triumvirate of policy uncertainty, we have monetary policy uncertainty amplified by threats from President Trump to name a successor to Jay Powell early. Trump said he could pick the next Fed chair as early as September, well ahead of Powell’s leaving date in May 2026, effectively creating a shadow Fed chair who could hold more sway with markets than the actual lame duck Fed chair.

Trump will seek yes man who will cut – he's already been calling for rates to be 2-3pts lower. Fed governor Kevin Warsh and National Economic Council director Kevin Hassett have been touted as potential candidates.

Bottom line – the Fed is staying cautious on rates right now, but if we get a shadow Fed chair in the autumn saying he will slash rates as soon as possible (ie May 2026), you may see inflation fears rise and markets will sell long-dated bonds and push the dollar lower. As this comes at the same as the tax bill cements massive fiscal deficits you can see why markets could get jittery again.

Ultimately it looks like we are heading into a situation of total fiscal dominance - ie the Fed is just a tool for the Treasury, which will need to come up with solutions to manage the ever-rising US debt. Much-anticipated SLR changes - the amount of Treasuries banks can hold on their books - is one solution to help ease pressure in the bond market, but policymakers could also look at cutting interest payments on bank reserves held at the Fed. Will the market play ball with a Fed that is so overtly political and openly acting to finance government deficits?

Bull Case

Peak fear is behind – April 7th was the peak fear moment for global equity markets in terms of trade. Negotiations on tariffs are taking place and this means market action will be far less volatile than April. Ultimately it’s a belief in the TACO trade – Trump Always Chickens Out.

Meanwhile the geopolitics is quietening down - Israel’s war with Iran has past the most dangerous phase. 

In terms of the US economy and the tax bill it seems the bond market has gone quiet and changes to SLR requirements will support the Treasury market to counterbalance higher deficits.

The Fed is looking more ready to cut – it’s just revised its growth outlook lower and may be inclined to cut in July. Fed officials Waller and Bowman have teed up a July cut and chair Powell sounded a tad more dovish in his Congressional testimony. Markets though still only price in a one-in-five chance of a cut next month. 

Earnings expectations are being revised higher as the economy in the US adapts to the new realities of tariffs that are not as bad as feared in April.

Passing of the “big, beautiful tax bill” – lower taxes will be seen as boosting animal spirits and lower taxes mean faster GDP growth.

Shadow Fed chair talks up rate cuts, stoking a rally for equities.

In short you get a situation where lower rates and lower taxes equal higher earnings and higher multiples and assume that markets look through everything else that could worry them.

Bear Case

The trade war is in the cold war phase and could hot up with the July 9th deadline. It’s unclear whether Trump extends the pause on tariffs and we could be in for a rocky road of re-escalation. 

Meanwhile it’s clear that the inflation effect from tariffs is likely to lag the headlines and the May soft CPI print is arguably not a harbinger of weaker price pressures. This could keep the Fed on the sidelines in wait-and-see mode for longer. A cloudier picture on inflation would tend crimp equity bulls.

Passing of the tax bill will cement unsustainable US deficits, rattling bond markets hard and result in the inevitable spillover into equities.

Geopolitics remains fragile even with the Israel-Iran ceasefire with the potential for fresh spillovers. It’s too early to say it’s over. 

Shadow Fed chair undermines monetary policy and ‘faith in the system’, fuelling an exit from US assets, sending bonds, stocks and the dollar lower.

US exceptionalism turns into US repudiation, underlining the importance of diversification.