Important lessons learned
- It is anticipated that recent federal tax legislation may lower the effective corporate tax rate by altering expenses and deductions.
- In 2025, rate cuts by the Federal Reserve have resumed.
- Homebuilders may profit if increased mortgage affordability is sustained by reduced long-term rates.
- A major theme in the second half of 2025 has been the ongoing strength of the current bull market, despite market volatility.
Two key events have shaped the market backdrop:
- New tax laws are passed, reducing the effective tax burden on firms.
- After a long break, the Federal Reserve is starting to decrease interest rates again.
Mid-cycle rate cuts have frequently occurred during periods of strong equity performance, and historical trends suggest that tax policies that reduce the cost of capital can encourage company investment, despite concerns from certain investors regarding market values.
1. Tax and interest rate reductions may keep the market moving forward.
The new tax law is expected to further reduce the effective corporation tax rate by increasing deductions for interest and capital investment costs, even if the statutory federal company tax rate of 21% remains in place. This is because the Tax Cuts and Jobs Act took effect in 2018.
Stronger earnings growth can result from increased business investment (CapEx), which has historically been linked to times after tax policies that reduce the cost of capital. Additionally, traditionally, when the Fed lowers rates in the middle of a cycle rather than in reaction to a recession, markets have done better.
Since recession risks are currently considered minimal, market performance may continue to be supported by the combination of lower taxes and interest rates.
2. Homebuilders could observe better circumstances
The decline in housing affordability has put pressure on homebuilding stocks. Fed rate reductions, however, can have an impact on borrowing costs:
- Changes in 10-year Treasury yields are frequently reflected in mortgage rates.
- Mortgage rates typically decline in tandem with those yields, aiding in the recovery of affordability.
In comparison to their historical norm, homebuilders are currently trading at comparatively low valuations. This industry has frequently outperformed the overall market in the following year when valuation levels are low.
3. Utilities performance has been uneven during rate-cut cycles
Although not enough to offset prior years of relative underperformance, utilities stocks have so far in 2025 outpaced the market.
Although utilities have historically performed poorly during rate-cutting cycles and have not always benefited when rates decline, some investors still look to them for their dividends.
How to generate ideas for investments
Many analysts believe that stocks will continue to be supported due to the observed environment of lower effective tax rates and renewed rate reductions. In comparable contexts, historically cyclical industries such as technology and homebuilding have demonstrated leadership, whereas utilities have been less reliable.
Need help planning for retirement?
If you are considering how these market themes may influence your retirement strategy, The Retirement Group can help. Call (800) 900-5867 to speak with our team about your retirement planning questions.
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