Market tuning out tariffs and tax bill and that will continue in second half, Barclays says

Barclays anticipates financial markets will increasingly disregard tariff and tax policy headlines, shifting focus instead to macroeconomic data and the potential for artificial intelligence to boost corporate earnings, particularly for large tech firms. While tariffs are expected to impact the global economy in the second half of the year and push U.S. core inflation above 3%—likely keeping the Federal Reserve from rate changes—the U.S. is projected to avoid recession. Barclays also expects the tax bill to pass before the August recess, as the S&P 500 approaches new highs, up over 4% year-to-date in 2025.

Analysis

According to research from Barclays, financial markets are poised to pivot their focus away from political headlines concerning tariffs and tax policy. The new primary drivers are expected to be macroeconomic data and the impact of artificial intelligence on corporate earnings, particularly for large technology firms. While tariffs are projected to dampen global economic growth in the second half of the year, Barclays anticipates the U.S. will avoid a recession and the world economy will emerge "relatively unscathed." A key consequence of these levies will be a rise in U.S. core inflation to above 3%, a level expected to keep the Federal Reserve from altering interest rates in its upcoming meetings. Concurrently, a significant tax bill is anticipated to pass Congress before the August recess, likely resembling the House's version. This outlook is set against a backdrop of market strength, with the S&P 500 up over 4% in 2025 and approaching new all-time highs, indicating investor confidence is already looking beyond near-term policy friction.

Key Decisions for Investors

• Investors should consider reducing sensitivity to Washington policy headlines and increase focus on fundamental drivers such as macro data and corporate earnings, particularly the 'AI dividend' in the tech sector.
• Given the forecast for U.S. core inflation to exceed 3% with a stationary Federal Reserve, portfolios should be reviewed for resilience against inflationary pressures and potential stagnation in rate-sensitive assets.
• Maintain a constructive but cautious outlook on U.S. equities, recognizing the market's current strength while preparing for a potential slowdown in global growth during the second half of the year due to tariff impacts.
• Monitor legislative progress on the tax bill, as its expected passage before the August recess could serve as a near-term catalyst for the broader market.