Citigroup’s US equity strategist Scott Chronert says the ballooning US budget deficit could have a positive impact on the economy.
In a new CNBC interview, Chronert says that the One Big Beautiful Bill Act recently passed in the U.S. House of Representatives will have zero effect on reducing the budget deficit.
According to the equity strategist, financing the budget deficit will have a stimulative effect on the economy.
“We think that the proposal as it came out of the House adds another $600 billion or so to next year’s deficit. Now that’s the bad news.
The good news is we actually now have tariffs beginning to kick in. And our math is that tariffs could offset about $200 billion of that. So what ends up happening, all told, is that you go from this TCJA (Tax Cuts and Jobs Act of 2017) extension, some puts and takes in terms of some tax, other tax cuts, some modest spending reductions, the tariff income and you’re back to about a $2 trillion deficit, which is where we are this year.
What that does from our perspective is two things – it means that financing this deficit is going to require ongoing higher treasury issuance, which means higher interest rates, potentially valuation overhang. On the other side, though, it’s still a positive fiscal impulse, which is net good for the economy, economic conditions. And most importantly, S&P 500 earnings.”
Chronert, however, warns that expansionary fiscal conditions could negatively impact stock prices.
“At the end of the day, higher rates presumably from a discounting of future cash flows perspective draws down or keeps a lid on where equity market valuations can go.”
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