What the "One Big Beautiful Bill" Means for Investors

Sean Gross, CFP®, AIF® | Co-Founder & CEO

After months of negotiations, a new tax and spending bill was approved by Congress and signed into law by President Trump on July 4. This new budget is far-reaching, including making many parts of the Tax Cuts and Jobs Act permanent, raising state and local tax exemptions, extending the estate tax limits, and much more. It attempts to offset some of these provisions with spending cuts in key areas such as Medicaid.

This bill matters because, while trade policy has been at the forefront over the past several months, tax and spending policy in Washington has been a growing source of uncertainty for many years. While there is political disagreement with the direction of this new budget, it does take the possibility of a “tax cliff” off the table - a situation where tax policy could have changed dramatically if provisions expired at the end of this year.

On an individual level, taxes directly affect many aspects of financial planning, and the specific provisions in this tax bill have immediate implications for household finances. From an economic perspective, many investors also worry about the level of government spending, the growing national debt, and other factors that have weighed on markets over the past two decades.

Thus, there are many angles from which to view the recently passed budget. What do investors need to know when it comes to their own financial plans and what it means for markets in the years to come?

The Tax Cuts and Jobs Act rates are now permanent

The new tax bill, dubbed the “One Big Beautiful Bill” by the administration, extends and expands several key aspects from the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire. It also introduces new measures that provide other benefits to taxpayers, which are only partially offset by spending cuts in other areas. Here are just some of the major provisions that may affect households:

• Current TCJA tax rates and brackets are now permanent. They were originally set to expire at the end of 2025.   
•  The standard deduction increases to $15,750 for single filers and $31,500 for joint filers in 2025.
• There is an additional $6,000 deduction for qualifying seniors (sometimes referred to as a “senior bonus”) that phases out for gross incomes exceeding $75,000. The provision expires in 2028.
• The alternative minimum tax exemption is now permanent. It also increases phaseout thresholds to $500,000 for single filers, which will be indexed for inflation in the future.
• The child tax credit rises from $2,000 to $2,200 per child, with future adjustments indexed to inflation to maintain purchasing power over time.
• The state and local tax (SALT) deduction cap increases to $40,000 from a $10,000 limit with annual increases of 1% through 2029. It is then scheduled to revert to $10,000 in 2030.
• A deduction for tip income capped at $25,000 annually for workers earning less than $150,000, effective through 2028.
• Some green energy tax credits are repealed, including electric vehicles and residential energy efficiency credits.
• The federal debt limit increases by $5 trillion. This will prevent Congress from having to debate and approve debt limit increases for some time, reducing political uncertainty.
• For businesses, the bill expands tax breaks designed to encourage domestic investment and job creation.

These and many other changes maintain the relatively low tax environment that has characterized the past several decades. As the accompanying chart shows, current tax rates remain well below the peaks experienced during much of the 20th century, when top marginal rates exceeded 70% and sometimes reached above 90% during wartime periods.

Growing concerns over fiscal deficits

Tax policy and government deficits are two sides of the same coin. This is because tax cuts reduce government revenues which then need to be offset by either lower spending or increased borrowing. However, most government spending is for entitlement and defense programs which are politically difficult to change. According to the Department of the Treasury, in 2025 21% of government spending is for Social Security, 14% for Medicare, 13% is for National Defense, and 14% is to pay interest costs on the existing national debt.

It's no surprise then that government borrowing has increased persistently over the past century and will likely continue to do so. The Congressional Budget Office (CBO), a non-partisan agency that supports Congress, estimates that this new tax and spending bill will add $3.4 trillion to the national debt over the next decade. This is against the backdrop of a federal debt that already exceeds 120% of GDP, or $36.2 trillion, which amounts to about $106,000 per American. However, it should be noted that the CBO has a well-documented history of issuing wildly inaccurate forecasts which tend to overestimate the cost of tax cuts and underestimate the cost of spending programs.1

Unfortunately, there are no easy solutions to this challenge, especially because this is a contentious political topic. On the one hand, tax cuts can stimulate economic growth, which may help to offset revenue losses through increased economic activity. On the other hand, Washington has a poor track record of balancing budgets even when the economy is strong. The last balanced budgets occurred 25 years ago during the Clinton years, and 56 years before that during the Johnson administration.

It’s also important to remember that there has not always been an income tax in the United States. The modern income tax system began with the 16th Amendment in 1913 which applied modest rates to relatively few Americans. The system expanded dramatically during the Great Depression and World War II, with top rates reaching 94% by 1944. The post-war period brought various reforms, including President Reagan’s Tax Reform Act of 1986 that simplified the tax code and lowered rates.

The situation has changed significantly in the intervening years. As the accompanying chart above shows, individual income taxes now represent the primary source of federal revenue. Social insurance taxes, also known as payroll taxes, are withheld from wages and help to pay for Social Security, Medicare, unemployment insurance, and other programs. Other sources of revenue are much smaller in proportion and include corporate taxes, which were reduced by the TCJA, and excise taxes, such as tariffs.

For investors, tax policies can certainly have direct implications on financial plans and portfolios. From a macroeconomic perspective, however, fiscal implications have more limited effects. Over longer periods, higher debt levels can influence interest rates and inflation expectations. While these factors have been relatively high in recent years, many of the worst-case scenarios have not yet occurred. The key for long-term investors is to maintain flexible, diversified portfolios that can perform across different fiscal and economic environments, rather than reacting to policy changes alone.

The bill continues the higher estate tax exemption limit

One set of provisions that would have been at the center of a tax cliff is the estate tax exemption. The TCJA doubled these limits which were scheduled to revert to previous levels this year. However, the passage of the new tax bill makes these higher exemptions permanent, further increasing the threshold to $15 million for individuals and $30 million for couples in 2026.

While it may seem like estate taxes only apply to higher net worth households, the reality is that all families must consider how assets can be passed to future generations. This requires a holistic approach that integrates estate planning, tax efficiency, philanthropy, and long-term family wealth preservation goals. It’s also important to keep in mind that individual states can also impose estate taxes with exemption thresholds that are less favorable than the federal level.

The bottom line? The new spending and tax bill extends and expands the current low-tax environment. For investors, a properly constructed financial plan should be designed or updated with these tax provisions in mind. When it comes to the possibility of growing deficits and the national debt, only time will tell if the CBO estimates are as inaccurate as they have been in the past.

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1 Dublois, H., & Carlsen, T. (2024, August 19). Scoring CBO’s Scores: Ten of the Worst CBO Blunders of the  21st Century So Far. Foundation for Government Accountability™. https://thefga.org/research/scoring-  cbos-scores-ten-of-the-worst-cbo-blunders/

Quarterly Market Update for Q2 2025: Tariffs, Geopolitics, and All-Time Highs

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Market Environment Indicator (MEI): The MEI remains Positive, with the weight of evidence continuing to suggest favorable conditions for stocks.

The second quarter of 2025 showcased both the resilience of financial markets and their sensitivity to policy uncertainty. From the White House's tariff announcements in April to escalating tensions between Israel and Iran in June, investors faced many challenges. Yet, the stock market went on to stage one of the fastest rebounds in history and finished the quarter at new all-time highs.

Overall, it was a strong quarter for stocks, while bonds also delivered positive outcomes. For long-term investors, these events are a reminder that while headlines can drive short-term swings, maintaining perspective and staying focused on fundamental trends remains the key to achieving financial goals.

Key Market and Economic Drivers in Q2

• The S&P 500 and the Nasdaq both ended the quarter at record highs, gaining 10.6% and 17.7% over the three months, respectively. The Dow Jones Industrial Average rose 5.0% and is 2% below its record level.
• The Bloomberg U.S. Aggregate Bond Index gained 1.2% in the second quarter. The 10-year Treasury yield ended the quarter at 4.2% after reaching as high as 4.6% in May.
• Developed market international stocks (MSCI EAFE) rose 10.6% and emerging market stocks (MSCI EM) increased 11.0% in the quarter.
• Gold rallied to a new record level of $3,431 per ounce, before settling at $3,308 to end the quarter.
• Bitcoin reached a high of $111,092 in May and hovered around $107,000 at the end of June.
• The U.S. Dollar Index continued to fall over the quarter, ending the quarter at 96.88. It started the year at 108.49.
• The Consumer Price Index rose 2.4% year-over-year in May, while core inflation, which excludes food and energy, came in at 2.8%.
• The University of Michigan Consumer Sentiment Index improved in May to 60.7, its first increase in six months. Consumers expect an inflation rate of 5.0% over the next year, down from 6.6% in the previous survey.
• At its June meeting, the Federal Reserve kept rates unchanged within a range of 4.25 to 4.5%.

Markets rebounded to new all-time highs

Despite significant volatility, the stock market recovered quickly once the worst-case scenarios for tariffs and geopolitical tensions did not materialize. The quarter began with heightened uncertainty following the announcement of new tariffs on April 2, which were more far-reaching than many investors had anticipated. However, as the administration engaged in negotiations and reached preliminary trade agreements with several partners, market sentiment improved. The Middle East conflict created a similar outcome, although markets were broadly resilient and went on to new highs after the ceasefire between Israel and Iran was announced. 

The equity market rebound was widespread, with many sectors, styles, and regions delivering positive outcomes. International stocks continue to lead the way in 2025, especially with the dollar weakening. Small cap stocks have lagged other parts of the market due to their greater sensitivity to tariffs and domestic trends, and the Russell 2000 index is still down -2.5% this year.

At a sector level within the S&P 500, Information Technology stocks experienced a strong recovery and contributed to new market highs. Many other sectors are supporting markets too, including Industrials which are now up 11.4% on the year, Communications which have gained 10.2%, and Financials up 7.5%. On the other end, Healthcare and Energy saw weakness.

Bond markets are also quietly contributing to portfolio outcomes, with relatively strong yields and falling credit spreads contributing during the quarter. Treasury securities and corporate bonds also experienced volatility during the tariff-induced drawdown, although the quarter ended in positive territory.

The dollar continued to weaken

The U.S. dollar weakened through the second quarter despite tariff pressures. While a weaker dollar can be negative for consumers, it can be positive for U.S. businesses and exporters, since it becomes cheaper for those using foreign currencies to buy our goods. While the dollar has declined this year and is near the low end of its range since 2022, its value is still high compared to the past decade.

When it comes to monetary policy, the Federal Reserve held interest rates steady at 4.25% to 4.5% throughout the quarter, reflecting a measured approach to monetary policy in an evolving economic environment. Fed Chair Jerome Powell emphasized the Fed’s focus on price stability even as other factors complicate the economic outlook.

Specifically, the Fed's updated economic projections reveal the challenges policymakers face. Officials now expect inflation to reach 3% in 2025 before moderating to 2.1% by 2027, marking an upward revision from earlier forecasts. They also expect real GDP growth to slow this year to 1.4%, a downgrade from a 1.7% projection in March. These adjustments reflect concerns that tariffs could spur inflation and slow growth.

The conflict between Israel and Iran added another layer of complexity to an already challenging environment. Israeli strikes on Iranian nuclear facilities and military targets beginning June 13 created immediate concerns about regional stability and potential escalation. However, the two countries agreed to a ceasefire after 12 days of fighting.

Bonds helped to provide portfolio balance

While the stock market has ended the quarter at new all-time highs, the decline and rebound was challenging for many investors. Fortunately, bonds helped to support balanced portfolios during the quarter. High yield, corporate, and Treasury bonds all provided balance and are positive year-to-date. Interest rates have remained higher than many had expected, and short-lived concerns in April about a flight from U.S. Treasury securities did not occur.

Budget discussions in Washington have brought renewed attention to America's fiscal trajectory. The national debt now exceeds $36 trillion, or approximately $106,000 per American. According to the Congressional Budget Office, the latest budget proposal could add an estimated $3.3 trillion in deficits over the next decade. While the proposal includes spending reductions, these are outweighed by tax cuts and spending increases elsewhere.

Moody's downgraded the U.S. credit rating in May, citing concerns about successive administrations and Congress failing to address "large annual fiscal deficits and growing interest costs." This echoes similar challenges raised during previous budget standoffs in 2011, 2013, and from 2018 to 2019. However, in each instance, agreements were eventually reached, markets stabilized, and economic growth resumed.

For long-term investors, these fiscal debates underscore the importance of maintaining flexible, diversified portfolios that can weather various policy outcomes. While deficit levels deserve attention, history suggests that the U.S. economy's fundamental strengths and adaptability remain intact.

The bottom line? The second quarter demonstrated both market volatility and resilience as investors navigated policy changes and global tensions. For investors, maintaining perspective and focusing on long-term outcomes remains the most effective way to achieve long-term goals.

Monthly Market Update for May 2025: A Positive Month Despite U.S. Debt Downgrade

June 6, 2025

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Financial markets rebounded in May with the S&P 500 recovering its year-to-date losses. This positive month occurred against a backdrop of new trade agreements, mixed economic signals, and ongoing concerns about U.S. fiscal health. While many reports continued to show that the economy is strong, consumers remained pessimistic about the future. Treasury yields fluctuated throughout the month due to concerns around federal spending and debt. For long-term investors, May serves as a reminder that markets can adapt to changing conditions, even when there is significant uncertainty around economic and fiscal policy.

Key Market and Economic Drivers¹

• The S&P 500 gained 6.2% in May, its best month since 2023, the Dow Jones Industrial Average was up 3.9%, and the Nasdaq rose 9.6%. Year-to-date, the S&P 500 is up 0.5%, the Dow is down 0.6%, and the Nasdaq is down 1.0%.
• The Bloomberg U.S. Aggregate Bond index declined 0.7% in May but is up 2.4% year-to-date. The 10-year Treasury yield ended the month at 4.4%.
• International stocks also performed well with the MSCI EAFE index of developed markets and the MSCI EM index of emerging markets both climbing 4.0%.
• The U.S. dollar index fell further to end the month at 99.3, near a three-year low.
• Bitcoin hit a new record high of $111,092 before ending the month at $104,834.
• Gold also hit a new record high of $3,422 before closing the month at $3,288, a 24% year-to-date gain.
• The Consumer Price Index report released in May showed that consumer prices rose 2.3% in April from a year earlier, the lowest 12-month increase since February 2021.
• The economy added 177,000 new jobs in April while the unemployment rate remained low at 4.2%.

Markets continued to recover despite new concerns

May's market rebound underscores the importance of staying the course during periods of market volatility. After a challenging April, markets demonstrated resilience by recovering most of their losses and returning to positive territory in May. This illustrates how quickly market sentiment can shift when conditions begin to stabilize, a pattern that investors have experienced many times over the past decade. Of course, the past is no guarantee of the future, and markets will continue to worry about trade deals, the U.S. debt, and the health of the economy in the coming months.

Moody's downgraded the U.S. credit rating

One of the biggest surprises in May was Moody's downgrade of the U.S. credit rating from Aaa to Aa1. This followed previous downgrades by Fitch in 2023 and Standard & Poor's in 2011 which all reflect concerns about the nation's growing debt and spending. The accompanying chart shows that the U.S. total debt grew to 122% of GDP in 2024. Net debt, which excludes debt the government owes itself, has risen to 97%.

Despite the historic nature of the U.S. debt downgrade, markets hardly reacted. This is because the downgrade is mostly backward-looking, and investors are already familiar with the nation's fiscal challenges. The muted response also reflects lessons from the 2011 Standard & Poor’s downgrade, when Treasury securities continued to be viewed as safe haven assets.

Perhaps it was not a coincidence that this downgrade occurred as the House of Representatives was passing a comprehensive tax and spending bill. The approved bill would extend the individual tax cuts from the Tax Cuts and Jobs Act. This includes a 37% top rate, child tax credits, higher State and Local Tax deduction caps, and exemptions for tips and overtime pay, among other measures. According to the Penn Wharton Budget Model, the legislation could increase deficits by $2.8 trillion over the next 10 years.² The bill will now be debated and potentially modified in the Senate.

While many would agree that these fiscal challenges require long-term solutions, the U.S. dollar remains the world's primary reserve currency and there will continue to be demand for Treasurys for the foreseeable future.

Trade negotiations show progress

There was also progress on trade negotiations in May, taking many of the worst-case scenarios off the table. The administration reached agreements with both the U.K. and China, while negotiations continued with other major trading partners. The U.S.-China trade agreement included a 90-day period of reduced U.S. tariffs on Chinese goods.

Despite these deals, there will likely continue to be uncertainty around trade. More recently, China and the U.S. have both accused each other of violating the trade truce, and the administration wants higher tariffs on steel and aluminum. At the same time, negotiations with the European Union produced optimism when the White House delayed its scheduled 50% EU tariff after positive discussions. This suggests that diplomatic solutions remain possible, even when initial positions appear far apart.

The administration is also facing legal challenges to its tariffs. In May, the U.S. Court of International Trade struck down many of the newly enacted tariffs, ruling that they exceed presidential power under the International Economic Emergency Powers Act. While a federal appeals court paused the ruling, allowing tariffs to remain in place for now, this legal challenge adds another layer of uncertainty to the trade landscape.

It is important to remember that trade policy typically unfolds over months and years rather than days or weeks. The recovery in May is a reminder that investors should not overreact to trade headlines, especially now that the worst-case scenarios are less likely to occur.

Steady earnings growth supports market

First quarter corporate earnings reports presented another reason for optimism. S&P 500 companies delivered positive earnings per share surprises and 64% reported positive revenue surprises, according to FactSet.³ This strong earnings performance highlighted the underlying health of corporate profitability, with technology companies showing resilience as they navigate trade uncertainty.

In contrast, consumers have been pessimistic this year due to tariffs and inflation concerns. However, recent sentiment indicators began showing signs of improvement that align more closely with positive earnings and economic data. The University of Michigan's most recent survey for May showed inflation expectations decreasing slightly and sentiment stabilizing. While it's important not to read too much into a single month's data, this improvement represents an encouraging development. A strong economy and improving sentiment could help to support markets.

The bottom line? May was a positive month for investors. While the U.S. debt downgrade and fiscal concerns created new challenges, progress on trade deals helped to boost markets. For long-term investors, these developments underscore the importance of maintaining perspective and staying focused on fundamental trends rather than short-term policy headlines.

1Standard & Poor’s, Nasdaq, Bloomberg. All month end figures are as of May 30, 2025.

2https://budgetmodel.wharton.upenn.edu/issues/2025/5/23/house-reconciliation-bill-budget-economic-and-distributional-effects-may-22-2025

3FactSet Earnings Insight May 30, 2025

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Guest Article: Why Keynesians got inflation and growth wrong.

We are delighted to share, with permission, the following article from highly esteemed economist Daniel Lacalle, PhD.1

Inflation is not soaring, and economic growth is solid.

The Tariff Tantrum has proven that consensus was wrong about soaring inflation and an economic slump. Why? The exaggerated perception of tariffs’ economic impact stemmed from the belief that American consumers would bear the full burden of tariffs. Why were they wrong?

The first reason was that most analyses relied on a simplistic calculation of tariffs, treating supply chains as if they only involved buyers and sellers. Supply chains are very complex, and most exporters must deal with overcapacity challenges and working capital problems. Thus, the impact of tariffs is likely to be absorbed by numerous links in the supply chain, including transport, storage, distribution, manufacturing, retailers and purchasing chains.

Furthermore, most exporting companies face a significant problem of overcapacity and working capital; if they don’t sell their products fast and effectively, their debt soars, and the losses at warehouses can lead to a chain of bankruptcies.

Ignoring that the world of exporter businesses, particularly in China, has a structural overcapacity problem and mounting financial challenges due to working capital build was one of the mistakes made by excessively pessimistic analysts. Therefore, there is no sign of inflation soaring anywhere. The Export Price Index rose only 0.1% in April and 2.0% year on year, while the Import Price Index rose a modest 0.1% in the month and 0.1% year on year. Prices dropped by 0.5% in the final demand PPI (producer price index) for April. On a year-over-year basis, headline and core April PPI declined versus previous readings.

United States retail sales rose by 0.1% in April, up 5.2 % from April 2024, and following a large 1.7% increase in March 2025. Inflation hit a four-year low in April, a month that should have reflected a massive increase due to tariffs, according to consensus estimates, while wage growth rose to a four-year high.

Inflation in April slowed to the slowest pace since 2021. Egg prices fell by 12%, and prices for bakery items, meat, and poultry also decreased. Americans are not suffering the apocalyptic inflation that interventionists predicted. The consumer price index (CPI) rose by 0.2% compared to the expected 0.3%—an annualised rate of 2.3%—and the lowest in four years. Furthermore, core CPI rose only 2.8%, showing no sign of inflationary pressures.

The first quarter’s gross domestic product was positive. Despite a 0.3% decline, the private sector increased by 1.6% annually. Government spending declined 5.1%. In the past week, JP Morgan has removed its call for a recession and the Atlanta Fed Nowcast shows a healthy 2.4% GDP growth for the second quarter, an estimate shared by Goldman Sachs and Capital Economics.

The key to understanding the lack of inflation is to look at monetary aggregates. Tariffs do not cause inflation. There are other reasons we can use to criticise tariffs, but not inflation causation. Market participants have realised that tariffs are a tool for negotiating better trade deals and facilitating the opening of markets rather than being used solely as a protectionist measure. The same reason why you need nuclear weapons to avoid a nuclear war: tariffs are required to force better trade deals.

The cause of inflation is the soaring government spending, which leads to an increase in both the money supply and money velocity. Deficit spending is down 35% between February and April 2025 compared to the same period last year. While money supply is rising, albeit at a modest pace, velocity of money is gradually declining. The public sector is slowly shrinking and the private sector is strengthening; hence, there is no real inflation risk.

The only thing that can make aggregate prices rise, consolidate, and continue is the debasement of the purchasing power of the currency due to uncontrolled government spending. Thankfully, government spending is starting to moderate.

The United States economy is stronger than it appears, and the negotiating power of importers is larger than estimated due to two factors: the previously mentioned overcapacity challenge of most exporters and the global relevance of the U.S. market. Exporters cannot substitute their U.S. sales with other markets. Even the European Union is relatively weak as a market.

In the following months, we will likely see more trade deals, and most concerns from market participants will probably vanish or at least be significantly reduced. Ultimately, the Tariff Tantrum has proven that Keynesian analysis is wrong and that successful trade deals were the goal of the administration.

1Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

Guest Article: China’s Keynesian Model Is Crumbling. It Needs a Trade Deal, Fast.

We are delighted to share, with permission, the following article from highly esteemed economist Daniel Lacalle, PhD.1

China’s Keynesian Model Is Crumbling. It Needs a Trade Deal, Fast.

May 11, 2025

In the past decade, the Chinese economy has expanded its central-planned neo-Keynesian model that simply cannot survive without a trade deal. The Chinese manufacturing sector has followed a running-to-stand-still strategy that simply cannot subsist without the enormous trade surplus with the United States.

The Chinese manufacturing sector overcapacity is not an anecdote. It is the norm. China produces 30% of the world’s manufacturing goods but consumes less than 18%, according to CKGSB. Additionally, China’s industrial capacity utilization rate fell to 74.1% in the first quarter of 2025.

China’s Keynesian central planning model aims to maximise employment and maintain strong economic growth, despite financial constraints and excessive indebtedness. Thus, it needs to sell its excess production to avoid a massive problem of working capital. Even the government has recognised the problem in a roundabout way, noting that “involution”-style competition (wasteful competition) is a major focus for the 2025 economic policy, and steps are being taken to reduce unnecessary investments and control growth in some industries. However, overcapacity in China is not a fatality; it was created by political design, with local and national authorities trying to boost GDP at any cost.

The model is aimed at keeping full employment and economic growth even with economic returns below the cost of capital, and it almost works if the excess capacity can be sold globally, receiving reserve currency and maintaining low costs by passing the working capital cost to global consumers and maintaining low production expenditure with currency controls and exchange rate fixing. However, the combination of rising debt, a constantly weakening currency, and the escalating bankruptcy and working capital issues could potentially bring this model to a collapse, even in the absence of an official recession.

China has learnt that it cannot endure a trade war and cannot substitute the US consumer, the richest and largest market, with European or Latin American consumers. Therefore, it needs a trade deal quickly before the domino of bankruptcies that has plagued the Chinese economy since 2021 erupts into a full-blown financial crisis.

China is officially in deflation for the third consecutive month in April. Business insolvencies are projected to increase by 7% in 2025 and by 10% in 2026, according to Allianz, even as the government implements additional fiscal stimulus.

Small and medium-sized enterprises, particularly exporters, are facing mounting bankruptcies due to declining cash flow and the elimination of US tariff exemptions. Job losses are rising in export-dependent regions, and the urban unemployment rate is expected to average 5.7% in 2025, above the official target, according to CNBC.

The official NBS Manufacturing PMI fell sharply to 49.0 in April 2025, the steepest decline since December 2023, reflecting a drop in output, new orders, and employment, with foreign orders shrinking to their lowest in at least eleven months.

The collapse of the real estate sector, which once accounted for up to 30% of GDP, has weakened banks, reduced household wealth, and led to a negative wealth effect, further depressing consumption and credit demand.

China’s economic strengths are well known, but the weaknesses are too important to ignore. The situation serves as a reminder that central planning never works. Everything that is weak in China comes from previous years of government policies aimed at boosting economic growth by building stuff and hoping it would sell at some point. Furthermore, rising bankruptcies, an imploding property market, and mounting local government debt strain the financial system just as non-performing loans from the Belt and Road Initiative (BRI) soar. Several BRI countries have defaulted on their debts or required IMF bailouts, including Sri Lanka, Zambia, Ghana, and Pakistan, while the BRI generated $385 billion in off-the-books debt.

Keynesian policies always lead to high debt and stagnation. However, when combined with a centralised planning system, a closed financial system, and capital controls, Keynesian policies create a dangerous mix of overcapacity, poverty, and economic slack. China can only begin to address its enormous working capital problem through a quick and successful trade deal with the United States. It will benefit China enormously if the government opens its economy, lifts capital controls, and allows the private sector to breathe. An implosion of the overcapacity problem hidden from the media, offset by even more central planning and stimulus spending, is only going to weaken China in the long run.

1Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.