What We Think
Honest insights on the markets from premier wealth management experts.
FBB Insights
Q2 2025 FBB Client Newsletter: Geopolitics and Markets
The first half of the year saw plenty of market surprises, many of which fell into a loosely-defined category of geopolitical events. President Trump’s “Liberation Day” tariff shock nearly pushed stocks into a bear market in April, while events in Iran last month left many market participants worried about spillover effects globally.
While both geopolitical events fueled some short-term volatility, investors appeared to take a longer view toward de-escalation, recovery and growth, with stocks entering a new bull market that drove the S&P500 up 6% between January and June. As we look ahead to the second half of the year, this letter will unpack some of these geopolitical events, along with potential implications for the global economy and capital markets.
Economic events tend to have bigger consequences
When investors think of geopolitics, many focus on armed conflict, natural disasters, or Presidential crises. However, historical events suggest that major economic surprises often have a more dramatic impact on markets. Data on roughly twenty geopolitical events since the 1950s suggests that, on average, security threats and military action often trigger a relatively short-lived one to two-week decline in equity markets, with stocks down in the mid-single digits on a percentage basis.
In contrast, investors tend to worry more about economic disruptions especially those happening during a market “bubble,” when asset prices inflate rapidly. The dot-com boom and bust, the housing bubble, and Great Recession are examples of economic events that caused much more lasting damage to markets than most security or military events.
What’s next for the economy?
While the current Middle East conflict may remain a risk factor, many investors are keeping a close eye on economic policy changes, including upcoming tariff negotiations. The administration had set a July 9 deadline for trade talks, after which the U.S. may instate severe tariff barriers that could impact company earnings and inflation. However, recent signals from the administration have indicated an extension to trading partners who are in serious current negotiations. At the same time, other U.S. policy changes, such as reduced immigration, could impact labor markets and add to wage pressures.
With numerous emerging geopolitical events, the Federal Reserve is starting to see some cracks forming in what has been a durable growth economy. Jay Powell’s team expects the U.S. economy to grow only about 1.4% this year, down from a prior estimate of 1.7% growth and slower than last year’s 2.5% expansion. The Fed also sees inflation running closer to 3%, which is well below a peak of 9% in 2022, but still hotter than its goal of 2%. The Fed also sees a modest worsening in the labor market, expecting the unemployment rate to move towards 4.5%, which is above the red-hot demand for workers we saw coming out of the pandemic when unemployment fell to 3.4%.
This economic slippage puts the Fed in a tricky situation for two reasons. On one hand, big tariffs could heat up inflation, which would suggest keeping short-term rates at the relatively high 4.5% level we’ve had since December. However, on the other hand, if tariffs and inflation lead to a consumer pullback, layoffs and a recession, the Fed would likely cut rates to rev up the economy. It is worth nothing that historically the data dependent nature of the Fed, or the “wait and see approach” often has them behind the curve with policy shifts. While the U.S. economy can take time to turn, once it begins it frequently moves quickly, and the data (and the Fed) are often catching up with the economy’s new reality.
From a timing perspective, markets are betting that current rates will hold until September, when a quarter point rate cut seems more likely. If these market projections are correct, interest rates may remain relatively high for at least a few more months, supporting our continued purchases of longer-term bonds that lock in these attractive rates.
Investor sentiment: U.S. vs. International
The U.S. is seeing some modest challenges to the economy, but the recovery in stocks suggests that investor confidence in long-term growth is increasing. We see some pros and cons here, with stock valuations hitting some of the highest levels seen since the pandemic or the early 2000s. However, on a more favorable note, market performance appears to be broader this year, as a more diverse set of companies drive stocks higher—a shift from last year when a select group of winners largely drove market returns. You can think about this like a sports team with many great players, rather than just one or two all-stars.
While the S&P500 has shrugged off tariff risks to generate modest performance, we are seeing a much different story outside the U.S. From an economic perspective, other developed regions such as Europe may see economic growth pickup on defense spending and higher deficits, along with lower interest rates. Anticipation of slightly faster growth outside the U.S. may be pushing down the dollar and adding to the performance of foreign stocks this year from the perspective of U.S.-based investors. While U.S. stocks have generally outperformed foreign markets in recent years, we view international stocks as offering diversification benefits at this point in the cycle.
As geopolitical events continue to play out across the globe, we remain focused on portfolio positioning with measured equity risk, complemented by stable and attractive bond income. For stocks, we favor companies that can adapt to new tariffs and other policies as they navigate geopolitical risks. We continue to seek out and own a diverse set of stocks and bonds with the potential to meet or exceed investor expectations, ever mindful of your long-term goals and objectives.
We wish you a Happy Fourth of July and all the best this summer.
Michael Bailey, CFA
Director of Research
Michael Mussio, CFA, CFP®
President
Women & Finance: The One Big Beautiful Bill – What to Expect this Tax Season
After much contentious debate, the One Big Beautiful Bill was signed into law by President Trump on July 4, 2025, following narrow approval by the House and the Senate. So far, the reception is mixed, with some taxpayers welcoming tax savings for individuals and businesses, and others concerned about cuts to programs like food stamps and Medicaid and how that will impact lower income Americans. Either way, the new bill is projected to add $3.4 trillion to the national debt over ten years, according to the Congressional Budget Office. If we look back to 2017 when the Tax Cuts and Jobs Act (TCJA) was passed, that bill enacted substantial changes to the tax code, but many of those changes were temporary and were set to expire or ‘sunset’ at the end of 2025. The One Big Beautiful Bill has now made permanent many of those temporary tax provisions from 2017.
We wanted to highlight a few of the key provisions from the new tax bill to give our clients a sense of what they might expect as they approach their 2025 tax preparation next Spring.
Permanent Changes:
- Changes to tax rates from the TCJA are now permanent and will no longer sunset at the end of 2025. The seven tax bracket structure ranges from a lowest bracket of 10% to a highest bracket of 37% (the top marginal rate was 39.6% pre-TCJA). Five of these seven tax brackets would have reverted to higher rates in 2026 without the passage of the One Big Beautiful Bill. In addition to savings for individual taxpayers, the corporate tax rate of 21% (from TCJA) is now permanent, continuing a substantial change to the tax-code for U.S. companies. (The top corporate tax rate was 35% pre-TCJA).
- Fewer taxpayers itemize and instead take the standard deduction after the 2017 TCJA, which practically doubled the standard deduction. With the new bill, those higher standard deductions levels will be maintained permanently, with an adjustment for inflation each year. The Standard Deduction for 2025 is $15,750 for single filers, and $31,500 for joint filers. (The TCJA temporarily eliminated personal exemptions, and the new bill permanently eliminates them.)
- The Child Tax Credit has increased slightly to $2,200 per child. The Child Tax Credit phases out for incomes above $200,000 for single filers and $400,000 for joint filers.
- Mortgage Interest Deduction – The maximum deductible mortgage interest is on home mortgage debt up to $750,000. Interest on debt above those amounts cannot be deducted. (This was initially changed by the TCJA in 2017, and the $750,000 debt amount has remained unchanged with passage of the new tax bill.)
- Qualified Business Income Deduction: This deduction for self-employed and small business owners is now permanent and allows for a deduction of up to 20% of qualified business income.
- Gift and Estate Tax Exemption: There was uncertainty for estate planners as the higher gift and estate tax exemption amounts set by the TCJA were set to expire at the end of 2025. Those higher exemption levels are now permanent after passage of the One Big Beautiful Bill: the gift and estate tax exemption for 2026 is $15 million per individual, with adjustments for inflation each year. A married couple effectively receives $30 million for the exemption. (Without this update, in 2026 the exemption would have decreased by half to pre-TCJA levels of $7.2 million per individual.)
- Miscellaneous Itemized Deductions were temporary suspended by TCJA and are now permanently removed.
- AMT (Alternative Minimum Tax) Exemption: The new tax bill extends the TCJA increases to the AMT exemption and phaseout thresholds. These amounts are set to adjust for inflation.
- Dependent Care Plans: The Flexible Spending Account (FSA) limit will increase in 2026 from $5,000 to $7,500 (single and joint filers), which allows parents to use pre-tax dollars for childcare expenses. This long overdue change brings relief to working parents as childcare costs have skyrocketed. The $5,000 limit was set in 1986 and until now has never been increased, with the exception of a temporary increase during Covid. The new dependent care FSA limit is not indexed for inflation.
- 529 Plans: The new tax bill brings big changes to 529 plans. The limit for expenditures for K-12 schools has increased to $20,000 per year, up from $10,000. The law has broadened qualified education expenses, and includes books, tutoring fees, and therapies for children such as speech language pathology and occupational therapy. Adults can now use 529 savings to pay for post-high school credential programs and continuing education.
Temporary Changes:
- SALT (State and Local Taxes): The TCJA limited the SALT deduction to $10,000, which significantly decreased the amount of state taxes and property taxes many individuals could deduct. The SALT deduction limit has now been raised from $10,000 to $40,000, but only for those making under $500,000 in income per year (single and joint filers.) However, this is only a temporary increase that extends through 2029. Taxpayers must itemize to use the deduction.
- Senior Deduction: The senior deduction is $6,000 for individuals 65 and older. The senior deduction phases out for incomes above $75,000 (single filers) and $150,000 (joint filers). This is a temporary deduction for tax years 2025 through 2028.
- Deduction for Car Loan Interest: Taxpayers can deduct up to $10,000 of interest for cars with final assembly in the U.S. The car loan interest deduction phases out for incomes above $100,000 (single filers) and $200,000 (joint filers). This is a temporary deduction for tax years 2025 through 2028.
- Deduction for tip income up to $25,000: The tip income deduction phases out for incomes above $150,000 (single filers) and $300,000 (joint filers). This is a temporary deduction for tax years 2025 through 2028.
- Deduction for overtime wages up to $12,500 (single filers) and $25,000 (joint filers): The overtime wage deduction phases out for incomes above $150,000 (single filers) and $300,000 (joint filers). This is a temporary deduction for tax years 2025 through 2028.
Having certainty around permanency of some of these tax provisions is a positive, however complexity of the Federal tax code remains. We encourage clients to work with your advisor and your tax preparer to address any questions as they arise.
About the Author: Martha P. Callahan, CPA, CFP®: Martha is a Certified Financial Planner® practitioner and brings over 17 years of professional experience to FBB through various roles in finance, business development, and accounting. A Certified Public Accountant since 2012, she enjoys working closely with clients to provide comprehensive and customized planning advice to help them achieve their financial and personal goals. Martha previously worked for a registered investment advisor as the Vice President of Operations, where she focused on operations, trading, and compliance. Her multifaceted career also includes work in commercial real estate and retail development in Easton, Maryland where she had the opportunity to work with local small business owners. Martha earned her MBA from Georgetown University’s McDonough School of Business and her Bachelor of Science in Mechanical Engineering from Virginia Tech. Martha works in FBB’s eastern shore office located in Easton. She and her husband Patrick have two boys and reside nearby in Oxford, Maryland where they enjoy spending time on the water.
*Please Note Limitations: The recognition by publications or media should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results or satisfaction if FBB is engaged, or continues to be engaged, to provide investment advisory services.
Important Disclosures
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FBB Capital Partners [“FBB]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from FBB. FBB is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the FBB’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.fbbcap.com. Please Remember: If you are a FBB client, please contact FBB, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your FBB account holdings correspond directly to any comparative indices or categories.
Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your FBB accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Get In Touch
CONTACT US TODAY
If you have any questions regarding our services, we encourage you to schedule a consultation with one of our financial advisors. We are pleased to offer customized wealth management and financial planning for your specific needs.