Featuring:

Host: Alicia Levine, Head of Investment Strategy and Equities, BNY Wealth  

Guest: Dan Clifton, Partner & Head of Policy Research, Strategas Securities 

[00:00:00] VO: What do you want your wealth to do for you? Welcome to Your Active Wealth from BNY Wealth, where we offer insights that can help support the life you want to live and the legacy you wish to create. We tackle timely topics through the lens of the five strategies that comprise our Active Wealth framework: Invest, Protect, Manage, Borrow and Spend, and provide guidance on navigating the unpredictable to help you build and sustain wealth.
 

[00:00:30] Alicia: Hi, I'm Alicia Levine, head of investment strategies and equities at BNY Wealth and host of today's episode. Welcome back to Your Active Wealth. BNY Wealth recently published the 2026 Outlook: Innovation Drives Opportunities, which discusses five themes shaping the economy, markets, and how those can impact your portfolio. Now we're generally positive about the year ahead, with technological innovation, a critical competitive advantage supporting U.S. economic leadership. We see range-bound inflation, lower interest rates, and a broadening of earnings growth. We think there are two forces that will help economic growth and the market in the year ahead, and those are policy and monetary easing. That's why we're so excited to have Dan Clifton with us today, partner and head of policy research at Strategas Securities. He'll bring his perspective on how the recently enacted One Big Beautiful Bill Act will benefit both consumers and corporations. And he'll also shed light on the potential policy initiatives in 2026, and what we should expect from the Federal Reserve. So, Dan, welcome.
 

[00:01:37] Dan: Thank you for having me. It's great to be with you.
 

[00:01:39] Alicia: First, I think it's helpful to look back at 2025. I think it's fair to say that if you were here a year ago, perhaps you could not have anticipated the rush of policy initiatives that we had in the entire year. So, there were a lot of policy initiatives put into place, but what surprised you the most about the administration's priorities?
 

[00:02:00] Dan: Well, Alicia, at first, it's been a wild year for public policy. And I would just put the Trump presidency in its historical perspective. Trump is the first president since 1893 to serve a second term that wasn't two consecutive terms in a row. That means over the last four years, he had plenty of rest and he had plenty of staff working on everything that they wanted to do. And they came right in and they flooded the zone. And as you know, this is something that we talked about this time last year that they would flood the zone, but it was far larger than anything that we had anticipated. And I would argue the scope of the level of tariffs that they went for very early in their administration was larger than most people anticipated. On the initial April 2nd proposal, Trump put out $700 billions of tariffs. This is several percent of GDP. And there was obviously a very quick and negative market reaction to that level of tariffs. And this went on for like five days. But what you saw was after that five days, that market signal and the political signal said something needs to change here. And that's when Trump handed over to the Treasury Secretary Bessent and said, get these tariffs lower. They were down to about $300 billion dollars. But I think importantly, Alicia, what they did was they spread it out over time to this July 9th deadline. And what that did was allow Congress to come in and pass fiscal policy legislation. And that was the basis of our view, is that these tariffs, which could have a negative economic impact, would be sterilized by fiscal policy and that's largely what they set out to achieve. One thing that I would say is hasn't been perfect timing. The tariffs are in place now, they're having an effect, but you're really going to start getting that pickup of fiscal policy in early 2026, which I think is consistent with your theme, is the candy is coming after a lot of spinach here in 2025.
 

[00:03:56] Alicia: And Dan, just to your point, you know, when they announced the tariffs, the markets quickly sold off about 20% from the high, which had to reach in February of this year. And then when they postponed the tariffs and started working on what became the One Big Beautiful Bill, the market almost immediately priced out the probability of recession, and it went down to near zero. And so, if that's the case, and that's what's driven the market really for the rest of the year off those lows. Let's go into that One Big Beautiful Bill for a second and let's start with the consumer. Because as we know, consumer spending accounts for 70% of US GDP. And consumers have really been very resilient, despite the uncertainty about tariffs, the really rock-bottom consumer sentiment numbers, and the fact that looks like the job market is cooling off. So, tell us what's going on in this One Big Beautiful Bill with the provisions that can help support the consumption side.
 

[00:05:00] Dan: Well, employment's been holding up. It's been weakening, but it's holding up, and that's still creating a bid for the consumer. And if I was designing the One Big Beautiful Bill, I would have done it much differently than the way Congress and the Trump administration decided to do it. What I would have done is I would have cut the income tax rate almost immediately as soon as the bill came through. And that would have allowed for those tax savings to be realized for consumers within one or two weeks of the bill passing into law. It would be the equivalent of every American getting a raise at once by changing their tax withholding in their income tax rates. And that's the way we did it in 2003. That's the way we did it in 2017. And that's the quickest and broadest way to get tax relief to the American consumer. And that's not the way they took this route in One Big Beautiful Bill. They basically decided to do it on the tax refund side. So, they expanded the state and local tax deduction from $10,000 to $40,000. They marginally increased the per child tax credit. They lowered taxes on tips, lowered taxes on overtime, lowered taxes on senior citizens, lowered taxes on auto loan interest. And a lot of that now is going to be payable in the first part of 2026. You're looking at $150 billion dollars of consumer aid that will be distributed in February, March, and April. That's about a half a percent of GDP on an annualized basis. It's about 2% of GDP on a quarterly basis. So, it is a very significant move for the consumer and I know a lot of people talk about this K-shaped recovery where the upper income's doing well, but the lower income is not. You know, when we've gone into it and reviewed who's going to benefit from this consumer stimulus, you see all income groups are going to benefit from it, but really the low and moderate, as well as middle to slightly middle, are going to be the biggest beneficiaries. In terms of dollar amount, middle to upper middle is probably going to get the most money on a percentage of your income. That's going to be a pretty big boost for the low and moderate income consumer. And really, if the job market holds up, then I do believe that this will be very incremental for the U.S. consumer and carry us through 2026. I would also note that consumers have been hit by these tariffs this year in certain areas. And those tariffs on a year-over-year basis start to go negative in mid-year. So, you're going to get this kind of replenishment of the consumer at the same time you're getting that year-over-year drag on tariffs out of the way. And I think that creates a very accommodative 2026 from a fiscal side, as well as the monetary policy changes that are also coming.
 

[00:07:48] Alicia: It was a big bill that really wrapped a lot of policy choices together. But you know, the other side of this is the corporate side because the act also created business-friendly provisions designed to stimulate investment, innovation, and domestic production. So how does that all work together and how do those provisions spur business activity and growth?
 

[00:08:11] Dan: Yeah. So again, the key to the consumer is you got to keep employment higher. And the way to keep employment higher is to replenish it to U.S. businesses. When we're going to provide about $235 billion dollars of tax cuts to U.S. businesses, if they really do three things. Number one, if you invest in a factory, you can write that off your taxes immediately. If you invest in CapEx, capital expenditures, capital goods orders, you could write that off immediately. And if you invest in research and development, you could write that off immediately. And what we know is that when you get those types of investments, that's what creates jobs in the United States and we're incentivizing that. And that to me is not one that's been well talked about. I mean, it's about expensing and depreciation codes, not exactly the coolest topic to be talking about, but one that's extremely important because when you combine it with the consumer income, you're looking at about $400 billion dollars of fiscal policy stimulus in 2026. And I think that's one of the reasons why you're going start seeing some of these concerns or that low consumer confidence, low business confidence that you referenced before. You'll start to see that ease as you get into 2026. Again, I would have liked to do it all together. If you're going to do tariffs, you do the tax cuts at the same time. We've had this uncomfortable six month period where you knew it was coming and you were getting hurt by tariffs. Now you're going to get the other side of that just as tariffs roll off. And I think that's creates a positive outlook for 2026.
 

[00:09:39] Alicia: That's pretty amazing. So as a result, like at BNY Wealth, our expectations for growth next year in earnings is 10-15%. And we do think the market's going to be powered by earnings with margins marching higher. So, these provisions we think are already getting to work, of course, powered by AI as well. But I think it's just interesting that the concerns about the tariffs really have been, as you say, sterilized by some of the policies coming out of this giant bill. But we are sitting here looking at 2026. So let us talk about what we think is going to happen in ‘26. We talked about the bill. We talked about the provisions. We haven't talked about deregulation. And we know that deregulation is a large priority for this administration. So, what does that look like going forward? Like what do you think the key developments to look for are going to look like?
 

[00:10:33] Dan: Yeah, it's a great question. And you know, when we talk about financial deregulation, I think that's going to be probably the biggest of all the deregulation efforts that are going to go on. Right now, what you're seeing is there's just a lot of bank capital sitting on balance sheets. It's used for regulatory purposes. So, once we get into about February, March, you'll begin to see a proposal from the Federal Reserve on how to deal with the Basel III requirements and a larger issue around financial and bank deregulation. And the goal here is to unlock some of that capital that's just been sitting there for years, unable to move and be able to unlock it so that money can then go into safe producing assets that banks have always invested in, whether it's going to be Treasuries or mortgages. And what that does is it begins to lower bond yields. It begins to lower mortgage rates. It brings down the mortgage spread to Treasuries, and it creates a lot more powerful catalyst to restart the housing market, which has been one of the key issues of unaffordability that the administration and previous administration was grappling with. So, I would anticipate that at least some of that excess capital, the estimates are about $200 billion dollars of excess capital, some people say it's more, but I would assume that a portion of that excess capital is going to be released. I want to be clear though that some of that proposal probably is not going to get done until mid-year. So, it's not going to be something that happens at the front end. It's going to largely take the baton from all this stimulus that we were talking about and be that next leg step. I would also keep a close eye on energy policy and energy deregulation, given that we're trying to power these data centers and we don't have enough power to do that. And so the U.S. is very committed to winning the AI race. It's almost existential for who's going to control the world over the next generation. And to do that, you're going to need lots of energy from all different sources. And I would expect to see a very aggressive energy policy. How do you get more natural gas? How do you use all the available sources? And really beginning to build out this small nuclear technologies that probably are going to take five or six years, Alicia, but are very, very powerful to make sure that we have the energy that we need to power AI down the road.
 

[00:12:54] Alicia: It's interesting because it's really almost like rolling stimulus, right? If you think about it in different parts of the economy, I like to think of the U.S. economy almost like a conglomerate. And so you pull on different levers at different times. But all of this really looks like the U.S. economy could grow 2+ percent, which is what we at BNY Wealth are projecting for next year. And I think a key part of that is that the market is pricing in the Fed cutting at least two more cuts in 2026. But there's been a lot of talk about the dual mandate, preserving full employment as well as price stability. Given the place that the FOMC is in, do you think there's room for a policy mistake? Because the labor market is clearly weaker. And, you know, simultaneously, inflation is clearly sticky around 3%. So how do you think the Fed balances this?
 

[00:13:46] Dan: Yeah. So you know, you come in, you got a new president, he's talking about tariffs. The Fed read that as inflationary. We're now learning it's deflationary because it slows employment. You know, we like to look at job layoffs, about 6% of job layoffs come from AI. That means it's coming from somewhere else. And so I, you know, my sense here is that the Fed probably kept rates up too high throughout the course of 2025. And to the chairman's credit, he pivoted in August and said, “I'm now more worried about employment than inflation”. There are definitely some people on the Federal Reserve who look at where inflation is today and say, “This makes me uncomfortable”. Most of them are the regional Fed presidents who are hearing from businesses and consumers in their district. But we have to make a distinction between the price level and the price change. The price change will continue to come down here over the course of ‘26, but the price level is so much higher than where it was before we got inflation in 2022. And it was the first time that we've had that in 30, if not 50 years, where you saw some sort of increase. So, consumers have to adjust to this and there's where the balance comes. But what I like to look at is home prices and how that affects inflation. It's 35% of CPI, continues to decelerate, serves as a nice counterweight. And so I look at energy prices. Again, the price of gallon gasoline now has fallen below $3.00. In parts of the country I travel to, I see it as low as $2.40. That is all really starting to help on the inflation side. But as you know, we're going to get a new Fed chairman in mid-year. And that new Fed chairman is then going to have to deal with a president who wants lower rates. By the way, I think this is going to be true for most presidents moving forward. But I wouldn't be surprised if you just see more pressure on the Federal Reserve moving forward from the executive branch, given the nature of the interest costs the U.S. government's paying on its treasurers.
 

[00:15:46] Alicia: So, let's turn to tariffs. The IEEPA tariffs are at the Supreme Court. We heard arguments that suggest that the court might be inclined to rule against the White House on this, against the administration. If that is the case, what happens with the IEEPA tariffs? Are there remedies? And what does the administration do in response?
 

[00:16:10] Dan: Yes, so the Supreme Court is considering whether tariffs that were imposed by Donald Trump under the International Economic Emergency Power Act is illegal. They had a hearing in November. If you look at the justices' questions, it seemed to suggest that Trump probably is going to lose six to three, or five to four. I just want to be clear judging from questions being asked is not a good indicator of Supreme Court decisions. A lot of them ask contrarian questions to understand what they're missing or really rely on the experts of the attorneys on both sides. So, it's not foolproof, but the betting markets are giving about a 30% chance of Trump's tariff surviving in the Supreme Court. So, the consensus is 70% they're going get thrown out and that could bring chaos if it gets thrown out. But our view has been very different than the consensus. Our view is that the Supreme Court is deciding how Trump is going to impose tariffs, not whether Trump can pose tariffs. Because what they could say is that Trump's tariffs under this International Economic Emergency Power Act does not justify using tariffs, and that's got to go. But if you declare a national emergency for trade deficits, Congress has already given you that power through the Balance of Payments Act of 1974, and you can impose a 15% tariff immediately. And that would be the first of a two-step process that would basically give Trump every power that he has and every tariff he has under IEEPA just through a different mechanism. And that's really important because if you're listening to what the administration officials are saying, is they're saying that they have a completely legal replacement plan in place that they are going to start moving on right away. So, don't bet on the idea that these tariffs are going to get thrown out, and that's going to be good for company X that has tariff exposure and really bad for bond yields because the U.S. budget deficit's going to decline, right? I do think that we'll have a couple of days of that, but that's not a sustainable position. And we believe the tariffs today are going to be very similar a year from now, even though we don't know how the Supreme Court is going to rule. And we're going to make those adjustments. Now we get into really cool things like tariff refunds. Companies have paid a lot of money in tariffs. You're now starting to see these court cases being filed in the Court of International Trade by very large companies that are saying, “Hey, we're harmed”. What they're trying to do is create a legal record that if they want to claim a refund or the Supreme Court has a refund process, that they have some sort of legal entitlement to it. So, you're probably going to see more and more of these companies filing these court cases until that Supreme Court rules. My guess is that if you didn’t get something by December 10th, you're probably not going to see something this year. And then that would get kicked out to January or February in terms of the decision. You never know with these decisions, but when you have a court case argued in November, if there's a lot of dissents, you usually don't get that case until February. And I do not expect this to be a unanimous decision. And I would expect several opinions put forward by the justices when this ruling is made and that takes time to develop that product.
 

[00:19:25] Alicia: Well, I think the last thing as we wrap here is that 2026 is a midterm election year. As we close, give us some things to think about as we invest in a midterm election year.
 

[00:19:38] Dan: So, it is a midterm election year and what we've noticed is that presidents are extremely effective in passing legislation in their first year to get economic growth higher in their second year ahead of the election. They all want to prime the economy. And we're literally seeing that same playbook be replicated by Donald Trump. They usually get that growth. You usually get about a half a percent of GDP increase in the midterm election year compared to the first year of a president's term. But what we also notice is that when that growth comes, you tend to get a little bit more defensive in the equity market midyear. It's not just that you get the growth. We have had 10 federal elections since the financial crisis. The voters of this country have removed the party in power in 9 of those 10 elections. If you look at the special elections that we've seen so far this year, you're probably going to see the Democrats favored to win in the midterm election. So, the equity markets got to grapple with that. So, you just see a little bit more short-term volatility in a midterm election year that you don't see in the other years of the presidential cycle. It's all temporary. Grind your teeth through it because there's this amazing data point that we know. And that is that the S&P 500 has not declined in the 12 months following a midterm election year since 1938. Now I'm probably jinxing it by telling you that right now, but there's a reason why that happens. You get that kind of volatility, creates a nice entry point, you rally out of it. By the time we get to election day 2026, investors are going to be very focused on who's going to be the candidates in 2028 and what stimulus is going to get done to the economy ahead of that election. And equity markets are very, very forward looking. So, I think this is going to be a wild year next year. 2025 was a wild year. It's what makes it fun and interesting, but it's also very serious in the changes that were happening that we're starting to see on the policy front. But my sense here is that as we get through the year, it gets better over the course of the year itself.
 

[00:21:38] Alicia: Well, Dan, I can tell you that I've lived through, you know, many midterm election years with you. And this has always been something that we think about, and it's been true that you rally right into it and out of it. So, I look forward to grinding my teeth as we watch this happen. But, you know, we want to remind our clients that the fundamentals are positive. A growing economy, a growing nominal GDP produces positive earnings. The past quarter, the third quarter of 2025 earnings season, was one of the best ever with an increase of 8% over expectations, which are driving 2026 earnings estimates higher. So, we're very positive on the earnings front, but you could still have a lot of volatility in part because of some of the policy changes that we are talking about. So, Dan, look, thanks for joining us. It's always great to hear your insights, giving us the roadmap to Washington and how we can reflect in our portfolios. For our listeners, please join us in looking at our 2026 Outlook: Innovation Drives Opportunities. And you can visit the BNY.com website to find that. Thank you for joining us, and we'll see you next time on Your Active Wealth.
 

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