Big Tech Gets a Boost From New Tax Law as Markets Shrug Off Tariff Jitter Investors may be uneasy over the latest tariff headlines, but history suggests that fear might be misplaced — especially with the S&P 500 sitting just 0.3% off all-time highs. According to UBS, when the index is at record levels, it typically takes 105 days before a 5% pullback occurs. In that time, equities tend to outperform cash and short-term Treasurys. So while going defensive might feel safe, historically it hasn’t been the winning strategy. Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, sees additional reasons for investor confidence. One is the belief that many of the proposed tariffs — particularly on Mexico and Canada — won’t be fully implemented. Goods that meet the rules under the U.S.-Mexico-Canada Agreement (USMCA), such as those manufactured entirely within member countries or significantly transformed, are likely to be exempt. Wilson’s team analyzed which industries are most exposed to tariffs. U.S. goods-focused sectors rely heavily on imports from China, followed by Mexico, Canada, and the EU. The real risk, they argue, would be a steep escalation in China tariffs — both due to broad sector exposure and the high market cap concentration of affected companies. Tariffs on Mexico would be the next-biggest threat, particularly if USMCA exemptions fall through. A specific area of concern is semiconductors. New levies on chips — vital to U.S. supply chains — could have broad ripple effects. “This could become a major issue depending on how Section 232 tariffs are applied,” the strategists warned. But there’s another story playing out beneath the surface — a rapid turnaround in earnings expectations. Analyst revisions have flipped from -25% in April to +3% now. Financials, in particular, have seen the strongest rebound in expected earnings per share. Then there’s the impact of the newly passed tax legislation, nicknamed the “One Big Beautiful Bill.” A key provision allows companies to expense R&D costs upfront, effectively lowering the corporate tax rate from 20% to around 13%. While this change won’t affect GAAP earnings — which already require immediate expensing — it will significantly improve cash flow. That cash flow benefit could explain why the so-called “Magnificent Seven” tech titans have led the market in recent months. Companies with more than $10 billion in deferred R&D tax assets — and thus poised to gain the most — include Alphabet, Amazon, Meta, Microsoft, Apple, Intel, and General Motors, according to separate investment bank research.

HSBC: Market Earnings Forecasts Are Too Pessimistic Ahead of Q2 Season With second-quarter earnings season about to begin, HSBC says the market is underestimating corporate performance — setting the stage for positive surprises. Despite recent shifts in U.S. trade policy, HSBC strategists, led by chief multi-asset strategist Max Kettner, believe markets are no longer as reactive to tariff headlines. “The tariff debate has faded into the background following the U.S.-China trade pause,” they note. “Risk assets are showing less sensitivity to these developments.” They point out that the U.S. economy remains solid, especially with consumer spending rebounding. As a result, current consensus earnings forecasts may be too low. “Pessimistic estimates create room for upside surprises, which could lead to positive earnings revisions and support further gains in risk assets,” the strategists explain. While tariffs carry inflation risks, HSBC says there’s little evidence of that so far — in fact, inflation appears to be cooling. Tariffs may also serve to keep investor positioning in check. Looking ahead to Q2 results, HSBC challenges the market’s expectation for a quarter-on-quarter earnings decline. “We don’t agree,” the team states. “Earnings estimates have seen the largest cuts in three years, and the front-loading of economic activity should provide a temporary boost to Q2 EPS.” Concerns about market valuation are also overstated, according to HSBC. On an equal-weighted basis, the S&P 500 is only slightly above its historical average — far from overvalued, in their view. In fact, many widely held bearish views on the U.S. — from slowing growth to a weaker dollar and continued equity underperformance — could be misguided. HSBC sees these as “pain trades” likely to catch investors off guard. Reflecting its bullish stance, HSBC raised its U.S. equity allocation by 4 percentage points, now recommending a 31% weight in its multi-asset portfolio. The full portfolio allocation is: 50% equities, 25% government bonds, 10% corporate credit, 5% commodities, and 5% cash.

JPMorgan: Foreign Investors Will Return as Retail Buyers Fuel U.S. Stock Rally Retail investors have played a major role in powering this year’s market gains — and JPMorgan believes they’re about to take the lead again. In a new report, strategist Nikolaos Panigirtzoglou and his team forecast a massive $500 billion in net inflows into U.S. equities over the second half of 2025, with retail investors expected to contribute around $360 billion of that total. The result? Potential gains of 5% to 10% by year-end. After aggressively buying the dip in March and April, retail investors pulled back in May and June to lock in profits. But JPMorgan says this was a temporary pause — not a sign of fading interest. “We expect retail investors to resume equity buying and continue supporting the market from July onward,” the strategists wrote. Other investor groups may offer limited upside. Hedge funds have already boosted their equity exposure and likely won’t add much more. Quantitative funds, which reduced positions earlier in the year, could re-enter later. Pension funds and insurers, however, are expected to keep selling stocks as they rotate toward bonds — with estimated outflows of $360 billion this year. One surprising potential source of renewed demand? Foreign investors. According to JPMorgan, overseas buyers have largely stayed on the sidelines since February — a trend they describe as a short-term “boycott” of U.S. equities. But that’s unlikely to continue for long. “Foreign investors can’t ignore the most dynamic part of the global equity market — the S&P 500 and the Magnificent 7,” the strategists said. The key to their return may lie in currency stability. A weaker dollar has discouraged international investment, but the ICE Dollar Index (DXY) is now hovering near its April lows around 98. If the dollar stabilizes, JPMorgan believes foreign inflows could rebound by another $50 billion to $100 billion. Combined, these factors could drive nearly half a trillion dollars into U.S. equities in the months ahead — and fuel another leg of the rally.