Trump’s $4.5 Trillion Tax Cut Bill: A Double-Edged Sword for Financial Markets

The U.S. Congress is fiercely debating President Donald Trump’s record-breaking tax cut proposal. The bill, which outlines tax reductions totaling $4.5 trillion over 10 years, is expected to have divergent impacts on the U.S. economy and financial markets in the short versus the long term. While it may boost growth in the near term, it casts a long shadow in the form of ballooning fiscal deficits and worsening income inequality. Let’s take a closer look.

Key Content: A Feast for the Rich or a Catalyst for Growth?

Scale and Structure of the Tax Cuts

The bill mainly extends the tax cuts introduced during Trump’s first term in 2017. On top of that, it incorporates new campaign promises, such as exempting tips and overtime pay from taxes—amounting to an estimated total of $4.5 trillion in tax reductions.

But the bill’s most controversial feature is its regressive nature. According to the Yale Budget Lab, the bottom 20% of income earners would see their after-tax income fall by an average of $560 (-2.3%), while the top 1% would enjoy a $32,265 increase (+2.1%). This underscores how the tax cuts are structured to disproportionately benefit high-income earners.

The Deficit Bomb: Entering the Era of 130% Debt-to-GDP

The Congressional Budget Office (CBO) estimates that the bill would increase the national debt by over $3.3 trillion by fiscal year 2034. The Committee for a Responsible Federal Budget projects that this would push the U.S. debt-to-GDP ratio to 130% by that time.

Even more concerning is the surging interest burden on the debt. Interest payments, expected to reach $1 trillion this year, could rise to $1.9 trillion by 2034—exceeding the U.S. defense budget of $890.5 billion (as of 2025). This raises serious questions about the sustainability of U.S. public finances.

Impacts on Financial Markets: A Crossroads of Risk and Opportunity

The Fed’s Dilemma and Interest Rate Policy

Treasury Secretary Scott Besant pledged to keep the fiscal deficit below 3% of GDP, but economists forecast it will average closer to 7%. This is occurring under conditions of near-full employment and above-target inflation—a setting that complicates the Fed’s job.

Amid Trump’s continued pressure for rate cuts, the Fed finds its policy space increasingly constrained by inflationary pressures from massive fiscal spending. The Fed is currently on a path of rate cuts but is being held back by “sticky inflation.” If the tax cuts inject too much liquidity, the Fed may have to raise rates instead, which would negatively impact equities and other risk assets.

The Bond Market Test

So far, the bond market has not shown panic over increased borrowing. Despite dollar weakness, U.S. Treasuries have remained relatively stable (though yields are already high, meaning prices have dropped significantly). This relative stability is due in part to the dollar’s safe-haven status.

However, this calm may not last. As fiscal pressure builds, the bond market could react sharply. Excessive Treasury issuance and soaring interest costs may undermine confidence in U.S. debt, pushing yields even higher and bond prices lower.

Sector-Specific Investment Opportunities and Risks

Defense and Security's Beneficiary

The bill allocates $150 billion to defense and $129 billion to homeland security over ten years. This includes $23 billion for the “Golden Dome” missile defense system and $28 billion for naval shipbuilding (focused on unmanned vessels), a clear boon for defense stocks.

Healthcare Sector's Impact

The healthcare sector faces unprecedented cuts $1.1 trillion over a decade. The CBO estimates 11.8 million people could lose health insurance. A core provision includes a work requirement of 80 hours per month for Medicaid recipients.

Threatened Renewable Energy

Subsidies introduced under Biden’s Inflation Reduction Act (IRA) would be slashed. Wind and solar projects must begin operations by the end of 2027 to retain current tax benefits. The Solar Energy Industries Association harshly criticized the bill, calling it a threat to America’s manufacturing revival and global energy leadership.

Key Takeaways for Investors

Short-Term View: Inflation and Rate Risks

In the next 2–3 years, investors should monitor inflation and long-term interest rates closely. Massive fiscal spending is likely to spur demand and fuel inflation, potentially triggering a hawkish Fed pivot. This could weigh on growth stocks and long-duration bonds.High-valuation tech stocks may face downward pressure, while financials could benefit from rising interest rates.

Mid- to Long-Term View: Fiscal Soundness and Dollar Hegemony

A deeper concern is the impact of fiscal deterioration on the dollar’s reserve currency status. A 130% debt-to-GDP ratio is high even by advanced economy standards. While alternatives like the Chinese yuan and the euro have their own limitations, the dollar’s safe-haven status may hold for now.Nonetheless, investors would be wise to diversify portfolios with assets like gold, real estate, and international holdings to hedge against potential dollar weakness.

Suggested Sector Strategies

Sectors to Consider (Buy):

• Defense & Aerospace: Lockheed Martin, Boeing, Raytheon

• Energy: Traditional oil and gas companies stand to benefit

• Financials: Rate hikes and possible deregulation are tailwinds

Sectors to Watch (Risk):

• Healthcare: Especially hospital chains heavily reliant on Medicaid

• Renewables: Subsidy rollbacks may slow near-term growth

• Consumer Goods: Lower-income support cuts could dent mass-market sales

  
  

Conclusion: Finding Investment Opportunities in Uncertainty

Trump’s $4.5 trillion tax cut bill is likely to deliver short-term economic momentum, while posing long-term risks to fiscal stability. For investors, it presents sharply divergent opportunities and threats across sectors. The key is to track inflation and interest rate trends closely and build portfolios that align with policy beneficiaries while hedging against vulnerable sectors. Above all, one must not overlook the structural imbalances this bill could worsen in the U.S. economy. It is a time for balanced strategies that weigh near-term gains against long-term risks.