3 Things You Need to Know This Week | US Tax Bill, Inflation Data, Growth vs Value (June 9, 2025)

Transcript

Tim Schluter:

Hello, and welcome to 3 Things You Need to Know this Week. Our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. Now, here are three things you need to know this week.

First up, a US legislative update.

The One Big Beautiful Bill act, which contains President Trump's legislative priorities, continues to work its way through Congress. The House of Representatives narrowly passed the bill in late May, and now senators are debating key aspects of the law as they prepare for their own vote. The main objective of the bill is extending the 2017 Tax Cut and Job Act's expiring provisions, namely higher standard tax deductions and, for most households, lower tax rates. In this sense, the bill would actually keep many tax provisions unchanged from where they are currently.

Regardless of whether you support or oppose the bill, it's likely to get scaled back in the Senate. Republicans hold a slim majority, which means even small disagreements within the party can stall progress. Republican senators aren't unified, with many arguing the bill costs too much. Some want bigger tax breaks, to strike Medicaid and food support program cuts, or to reduce state and local tax deductions. And Democratic senators are highly unlikely to support this bill.

Considering the likelihood of many of the bill's provisions changing through the legislative process, we would caution investors from getting too worked up over anything yet. That doesn't mean there won't be any surprises or unintended consequences, and mega bills like this are certainly worth watching, but we don't think the big beautiful bill is the "game changer" many make it out to be.

Next, US inflation data.

The latest US consumer inflation data comes out on Wednesday. Overall, recent CPI inflation figures have remained well below their long term average of 3.2% year-over-year, and we expect inflation to remain relatively moderate ahead. Still, many consumers believe inflation is headed upwards, fueled by tariffs. In fact, the University of Michigan's April Consumer Sentiment Survey revealed respondents expect prices to rise over the next 12 months at their fastest pace in over four decades.

These inflation expectations are higher than levels seen in the summer of 2022, even though actual inflation and supply chain disruptions were far worse than. While some worry elevated consumer inflation expectations could become a self-fulfilling prophecy, we see sentiment surveys as a snapshot of how people are feeling, and not a reliable indicator of what will happen next. Remember, inflation is a monetary phenomenon. Too much money chasing too few goods and services, leading to price increases economy wide.

Take tariffs for example. They may cause increases in prices for some goods and services, but money supply growth remains modest and is unlikely to provide the fuel needed for a broad tariff related inflation surge. To us, indicators like moderate money supply growth, among other factors, point to likely milder inflation than consumer expectations currently suggest.

Finally, Europe and value stock leadership.

In recent years, large US growth stocks, particularly in Technology, have led the market. However, entering 2025, we expected leadership to shift in favor of non-US value stocks, particularly in Europe, which has played out so far. Why is this the case? First, what do we mean by value stocks. One way to categorize stocks is by style, meaning whether they are growth or value oriented. As you can see on this chart, value stocks often trade at their prices closer to their current book value. While growth stocks often are generally priced based on their future earnings potential. Value leadership this year has been supported by the steepening global yield curve.

Yield curves plot government bond rates, from short-term rates to long term rates, such as from three-month to ten-year yields. A steep yield curve, where long-term rates are materially higher than short term rates, typically signals higher profitability for banks, incentivizing them to lend. Since value companies tend to be economically sensitive and more reliant on bank lending, they normally benefit from this trend. We think Europe is particularly well positioned to continue to lead the way. Not only is the European yield curve steepening, but relatively muted sentiment likely sets up more room for positive surprise for European stocks.

And European markets are more value oriented, with very few Tech and Tech-like stocks. The value rich Industrials and Financial sectors represents nearly 40% of the European stock market. Europe also has many value oriented Consumer Discretionary stocks. While we don't expect US and Tech stocks to do poorly this year, we anticipate Europe to lead the way.

And that's it for this episode of 3 Things You Need to Know this Week.

For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in, and don't forget to "subscribe!"