From Liberation Day to Independence Day

Business confidence needs to improve to restart U.S. investment and growth—could the forthcoming tax bill provide the impetus?

At the end of March, we noted that investors were getting ready for a package of hard data on the U.S. economy that would “either confirm or correct the pessimism evident in recent consumer and business surveys.”

But we also noted that those same investors expected the forthcoming announcement on “reciprocal tariffs” to introduce some policy predictability. Given the unpredictability of what followed, that already seems like ancient history—as does all the hard data that was going to clarify where the economy is going.

After a week in which U.S. consumer price inflation and retail sales attracted a lot of attention, we also think it’s worth noting that consumer spending is unlikely to provide the next meaningful boost to U.S. growth. If a boost is coming, we think it will have to come from hiring and investment in the corporate sector.

Which brings us back to the topic of U.S. business confidence.

Sentiment

First-quarter earnings by S&P 500 companies sum up investors’ dilemma. Year-over-year earnings growth is running at 13.4%, according to FactSet, a significant upside surprise. A huge swath of companies declined to provide earnings guidance for the second quarter, however, due to the exceptional policy and economic uncertainty. Among the rest, those issuing negative guidance outnumber those with a positive outlook by 20%.

What about smaller businesses? The April survey from the National Federation of Independent Business (NFIB) came out last week, and it showed the fourth consecutive decline in U.S. small business optimism this year—even as 69% of respondents said the overall health of their firm was good or excellent. The net percentage of business owners expecting better conditions fell by six points to a level last seen before the November election. Plans for inventory investment are at their lowest level in 11 months.

Remarkably, the number of businesses planning capital outlays in the next six months is as low as it was in April 2020, at the height of the COVID-19 pandemic. Less than one in 10 think that now is a good time to expand their business, which is the lowest reading on record. Regular surveys by the Dallas, Kansas City, Richmond, Philadelphia and Chicago Federal Reserve Banks paint a similar picture of capex expectations collapsing back to pre-election levels.

It is this sentiment, in our view, that needs to be reversed if the U.S. is to achieve positive growth in 2025.

Taxes

De-escalation of the U.S. trade war, evident in its pact with the U.K. and, especially, the huge tariff cuts agreed to with China last week, could provide the catalyst—that has certainly been where the market has focused over the past few days.

But while this direction of travel is welcome, it is still likely to leave U.S. businesses facing an average tariff well into double digits, which is substantially higher than at the start of the year and close to where bearish expectations were before April 2.

Moreover, surveys like the NFIB’s suggest that, at least so far, tariffs are not the main thing weighing on business sentiment. While it used to be inflation, that has slipped down the list of concerns, and business owners appear increasingly able to resist demands for higher wages. Labor quality remains the top challenge, but that, too, is easing. The notable riser over recent months has been taxes. The proportion of business owners reporting tax as their single most important problem is as high as it has been for three and a half years.

Independence Day

Therefore, the key date for investors might not be “Liberation Day,” or the various and shifting negotiation deadlines associated with it, but Independence Day.

July 4 is the date set by U.S. Treasury Secretary Scott Bessent to finalize the administration’s tax and spending bill, partly forced by estimates that the U.S. debt ceiling will be breached in August. Progress has been steady so far: The proposal got through a handful of House committees by the end of April, and the Ways and Means Committee presented its closely scrutinized first draft last week.

Business lobby groups welcomed the text. Rumored reform to carried interest and a new tax bracket for high earners were absent, and the 21% corporate tax rate will be preserved.

The amount of “Section 199A” Qualified Business Income that pass-through businesses can deduct from their tax bill would be raised from 20% to 23%, and made permanent. The draft bill provides for a return to immediate expensing for R&D costs, as opposed to requiring them to be capitalized and amortized over a five-year period as they have been since 2022.

The bill also returns to the more favorable “EBITDA approach” to calculating the net interest deduction limit, and would allow 100% depreciation for qualified production property through 2028. Small Taxpayer Status would be extended to a broader set of manufacturing companies.

Taken together, these measures would be a big deal for U.S. business.

Debate

There is still a long way to go, and potentially a lot of controversial debate among Republican lawmakers, before this draft is finalized and fitted into the larger budget reconciliation.

Some of that debate has been anticipated in the draft provisions. For example, the changes to R&D expensing and the net interest deduction expire in 2029, taking away some certainty from business owners to mollify the Republican party’s fiscal hawks—early estimates suggest that this draft bill could cost more than $5 trillion over the next decade.

Nonetheless, if something resembling this draft makes it into the final budget, it would go a long way to addressing the concerns that businesses say are holding them back. Combined with a clearer outlook on tariffs and trade, and possibly moderately lower rates, this could brighten business sentiment in the second half of the year—with more investment, jobs and growth to follow.

Expect fireworks on July 4.