On July 4, U.S. President Trump signed the “One Big Beautiful Bill Act” (OBBBA) into law following a narrow approval from both chambers of Congress. This article, building on our previous publication “When will U.S. debt be too much?”, delves into the economic and investment implications of the OBBBA.

What’s in the OBBBA? Who are the winners and losers?

The expansive bill extends the 2017 Tax Cuts and Jobs Act (TCJA), eliminates taxes on overtime and tips, and increases state and local tax deductions (SALT), while boosting spending on defense and border security. Workers receiving tips and overtime, domestic manufacturers, fossil fuel producers, and small business owners stand to gain.

To finance the stimulus, the bill imposes restrictions on Medicaid and reduces spending in areas like food benefits and clean energy incentives. As a result, hospitals face higher uncompensated Medicaid costs, and clean energy and electrical vehicle companies lose state support. Immigrants and elite universities are also adversely affected.

How will the OBBBA impact the U.S. economy?

The bill is generally stimulating, but not aggressively so.

In the short term, consumers and businesses may receive income tax refunds (as new tax cuts take effect in early 2025), particularly in the first half of 2026. However, the boost in consumers’ disposable income might be partially offset by tariff inflation.

While the TCJA extension accounts for the bulk of the bill’s cost (USD 4.6trillion), extending this prevailing tax structure is not inherently stimulating. New tax cuts (e.g., on tips, overtime, factory investment etc.) only amount to USD 702billion, according to the Committee for a Responsible Federal Budget. Spending cuts in the bill further temper the bill’s stimulus. 

Overall, we expect the economy to cool down, heat up and then cool down again over the course of the next 18 months. The moderate growth boost could keep the Federal Reserve (Fed) on hold.

The OBBBA could boost the gross domestic product (GDP) in late 2025 going into 2026, so we could still see softening economic data in the coming months. The long-term impact depends on whether parts of the bill get extended or are allowed to sunset in 2028. Growth headwinds, such as higher inflation and lower immigration, could persist as well.

What is the cost of the OBBBA? How does it impact the U.S.’s fiscal position?

The bill is projected to add USD 3.4trillion to deficits over the next decade, according to the Congressional Budget Office (CBO). With additional interest costs, the number will reach nearly USD 4.0trillion. If tax cuts extend beyond 2028, which is likely, accumulated deficits could reach USD 5.5trillion in the next 10 years.

Can tariffs help? While the situation remains fluid, the CBO recently estimated that tariffs (those in effect by May 13) can reduce primary deficits by USD 2.5trillion in the next 10 years. However, tariffs also drag on economic growth and import volumes, reducing revenue. Accounting for that, Tax Foundation estimates the figure to stand at USD 1.4trillion on a dynamic basis.

The bottom line is that even with additional revenue from tariffs, U.S. deficits will likely increase above 6% of GDP (Exhibit 1). The deficit expansion (and thus stimulus) is also front-loaded–most impactful in 2027 (USD 537billion) and 2028 (USD 507billion). After the 2028 elections, more spending cuts kick in and deficit expansion narrows.

This will cause the U.S. debt-to-GDP ratio to rise from 98% last year to 129% in 2034.

Will we see stress in U.S. debt?

The passing of the OBBBA puts a floor on long U.S. Treasury (UST) yields. Current levels have adjusted for the fiscal stimulus, and we expect yields to continue trading range-bound. We don’t see near-term risks of immense stress, but yields could remain structurally higher.

From a 3.99% low in April, 10-year UST yields rose more than 50 basis points (bps) in May due to debt concerns and the Moody’s downgrade. However, as the OBBBA makes its way through Congress, yields were stable at around 4.25-4.35%, reflecting investors’ relative confidence.

From a short-term perspective, the OBBBA raises the debt ceiling by USD 5trillion (higher than the USD 4trillion in the initial House-passed bill), which removes near-term tail risks of a U.S. debt default.

From a medium-term perspective, the structural demand for the USD and UST provides the U.S. with more “fiscal space” than other economies, as outlined in our previous publication. This increases investors’ tolerance of the debt level and reduces risks of a medium-term debt strain, especially if the credibility of the Fed is maintained.

However, the longer that debt is allowed to grow, the harsher the eventual fiscal adjustment necessary. Immense stress could be triggered if debt growth or rising interest rates significantly outpace GDP growth. The UST term premium, at a 10-year high now, reflects this fiscal risk, though the OBBBA did not cause a sharp rise (Exhibit 2). However, we do expect the premium’s gradual expansion since 2020 to continue due to higher inflation and interest rate volatility, as well as increased price sensitivity, contributing to structurally higher yields and a steeper yield curve.

All in all, we don’t see near-term risks of a debt strain. While tariff inflation remains a risk, if yields spike to appealing levels, we think investors can take a calculated risk in extending duration.

How does the OBBBA impact the equity outlook?

The bill could have varying impacts on select companies, benefiting fossil fuel producers, defense companies and domestic manufacturers etc., while dampening prospects for hospitals, clean energy and electrical vehicle companies that receive less state support.

The modest growth impulse from the bill means that other policies, such as tariffs and deregulation, remain crucial. For example, higher tariff costs could offset corporate tax cuts in manufacturing, and inflation from tariffs could deter consumer spending despite tax refunds. Thus, despite the passing of the OBBBA, we continue to monitor other policy risks that could significantly impact corporate margins and economic growth.

09dz250807083511