Despite growing concerns over America's swelling budget deficit, Citigroup’s U.S. equity strategist Scott Chronert believes the situation could bring short-term gains to the broader economy—even if it comes at a cost to market valuations.
Speaking to CNBC, Chronert explained that the latest spending package, dubbed the One Big Beautiful Bill Act, is unlikely to reduce the deficit. In fact, it adds an estimated $600 billion to next year’s fiscal shortfall. Yet, paradoxically, this extra spending may act as a stimulus.
Chronert noted that while the deficit is set to climb again, new tariff revenues could partially offset the increase—possibly covering up to $200 billion. Combined with minor tax tweaks, limited spending cuts, and the continuation of 2017’s Tax Cuts and Jobs Act provisions, he expects the overall deficit to settle near the $2 trillion mark, consistent with the current year.
This fiscal path, he argues, leads to two outcomes. On one hand, it forces the Treasury to issue more debt, potentially pushing interest rates higher and placing downward pressure on asset valuations. On the other hand, it creates what economists call a “positive fiscal impulse”—a boost in government spending that supports GDP growth and corporate earnings.
However, Chronert also emphasized a looming downside. Elevated interest rates—driven by the increased supply of government bonds—could weigh on equity valuations by making future cash flows less attractive in present-value terms.
In essence, while the U.S. government’s aggressive fiscal stance might keep the economy humming, investors may need to brace for a more turbulent environment in equity markets.
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