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The Tax Bill and Your Portfolio: Four Takeaways

Jun 4, 2025

The “One, Big, Beautiful Bill Act” could extend tax cuts and benefit key equity sectors, but it may also add to U.S. deficits and keep rates higher for longer.

Author
Monica Guerra, Head of US Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, US Policy Strategist, Morgan Stanley Wealth Management

Key Takeaways

  • The 2025 House budget bill extends key tax cuts, potentially benefiting individuals and businesses.
  • The bill could add about $3 trillion to U.S. deficits over a decade, raising concerns about fiscal sustainability.
  • Key equity sectors like industrials, communication services and energy may benefit from the bill’s pro-growth tax provisions. 
  • Elevated deficits could lead to sustained higher interest rates, potentially raising borrowing costs and weighing on asset valuations.

As the U.S. presidential administration and the Republican-led Congress advance their fiscal agenda, the 2025 budget reconciliation bill – dubbed “One, Big, Beautiful Bill Act” – has emerged as a critical piece of legislation that seeks to extend and expand tax cuts while reducing spending to curb deficit growth.

 

Having cleared the U.S. House of Representatives, the bill now awaits Senate approval or further reconciliation. Lawmakers hope to deliver final legislation to the president by July 4.

 

However, the path to enactment is fraught with challenges as lawmakers navigate competing priorities and fiscal constraints, which may result in both less significant spending cuts and more tempered tax reductions than those initially proposed.

 

The inclusion of the federal debt limit in the bill also imposes a crucial deadline: Congress must act before the potential date of government default, which is anticipated between July and October.

 

As the legislation evolves, here are four things to know about how it might affect your personal tax situation and investment portfolio.

  1. 1
    Tax cuts and deductions are likely to be extended.

    In its current form, the legislation seeks to extend provisions of the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, including individual tax rates, increased standard deductions, estate and gift tax exemptions, and child tax credits. It also proposes raising the state and local tax (SALT) deduction cap from $10,000 to $40,000 per household, up to income of $500,000.

     

    Additionally, the bill revives pro-growth tax provisions for businesses, such as 100% bonus depreciation for equipment investment, immediate deduction of domestic R&D expenses and looser business interest expensing through 2029. These measures are intended to stimulate economic activity but may face adjustments as negotiations continue.

  2. 2
    U.S. deficits may increase significantly.

    The tax bill is likely to meaningfully increase U.S. government deficits. The Congressional Budget Office (CBO) estimates that the latest version of the House budget bill delivers roughly $3.7 trillion in tax cuts, offset by $1.2 trillion in spending cuts and revenue raisers, leading to a net deficit impact of about $2.3 trillion over a decade. However, the actual deficit growth could be closer to $3 trillion when considering factors like interest expenses.

     

    To pay for tax cuts, the bill includes ways to raise revenue, such as a progressive tax on net investment income for university endowments and private foundations as well as a 3.5% excise tax on foreign remittance transfers. However, the bulk of the offsets for tax cuts come from spending cuts targeting climate initiatives and health programs – for example, by phasing out Inflation Reduction Act (IRA) clean energy tax credits and altering Medicaid and Affordable Care Act (ACA) provisions.

     

    Tariff revenues could also partially offset the deficit, though trade negotiations remain uncertain.

  3. 3
    Key equity sectors may benefit.

    Historically, stock market performance is far more closely tied to the business cycle than to changes in marginal individual and corporate tax rates. The S&P 500 Index, for instance, shows only a weak correlation with tax changes, and given that the 2025 proposed tax cuts are mainly extensions of existing policies, any stock market gains are likely to be marginal.

     

    That said, certain equity sectors stand to benefit. The Morgan Stanley Institutional Equity Division Domestic Tax Policy Beneficiaries Index, which includes industrials, communication services and energy stocks, has outperformed the small-capitalization Russell 2000 Index by about 7% over the past year. It consists of stocks exposed to favorable tax provisions, including increased bonus depreciation and lower tax rates for domestic firms.

     

    Additionally, with a large majority of IRA funding for clean energy projects going to Republican-controlled districts, the latest House budget bill proposes a gradual phase-out – rather than outright repeal – of many of the law’s clean energy tax credits. This approach has helped clean energy stocks outperform the broader market this year.

  4. 4
    Interest rates may remain elevated.

    The continuation of elevated U.S. government debt and deficits could lead to a higher-for-longer interest rate environment.

     

    As the government borrows more money by issuing bonds, the increased U.S. Treasury supply, coupled with potential further declines in foreign holdings, may drive U.S. bond prices lower and yields higher. (Bond yields move inversely with prices.)

     

    Additionally, investors may continue demanding higher “term premiums,” or extra yield, to compensate for the risks of holding long-term government bonds at a time when large federal deficits are creating uncertainty about future fiscal policy and economic stability. This, too, pushes rates higher, which can portend increased borrowing costs and may weigh on the valuations of stocks and bonds alike.

While the 2025 budget resolution is likely to add significantly to the federal debt and deficit, pro-growth tax policies could support certain equity sectors. For investors, this backdrop favors U.S.-focused, domestic tax beneficiaries in sectors such as industrials, communication services, and energy.

 

Your Morgan Stanley Financial Advisor can help you navigate the complexities of investing as the legislative process unfolds. Staying informed and adaptable will be key to making sound decisions. To learn more, ask your Morgan Stanley Financial Advisor for a copy of the report, US Policy Pulse: The Architecture of Tax Policy.

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Glossary

Term premium is the excess yield that investors require to commit to holding a long-term bond instead of a series of shorter-term bonds.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

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Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

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