Trump’s “Big Beautiful Bill” threatens equity markets as global debt wall looms
Trumps massive deficit spending plan coincides with an unprecedented refinancing burden that could drain market liquidity.
For what it’s worth, I believe U.S. President Donald Trump’s ambitious tax-cutting legislation, dubbed the “One, Big, Beautiful Bill,” is racing through Congress at precisely the wrong time for equity investors. Some liquidity experts go a step further and warn of an impending global debt refinancing event that could starve markets of capital.
The Congressional Budget Office (CBO) estimates Trump’s sweeping tax bill will add approximately US$3.8 trillion to America’s already staggering US$36.2 trillion national debt over the next decade, dramatically expanding the government’s borrowing needs just as global financial markets face what liquidity specialist Michael Howell from macro research house CrossBorder calls a “debt maturity wall”.
Howell warns that a substantial wave of pandemic-era debt issued at low interest rates will mature between 2026 and 2027, necessitating refinancing at higher rates and consuming significant liquidity. This has more than a little potential to create a period of heightened uncertainty where increased U.S. government borrowing collides with massive global refinancing needs.
A forthcoming liquidity squeeze?
According to Howell’s analysis, refinancing tensions arise when the debt-to-liquidity ratio moves significantly above the 2.5 times long-term average. The ratio is expected to jump above this danger threshold in 2026 and likely exceed 2.7 times by 2027. CrossBorder suggests this represents a technical breakdown, and as capital is redirected toward debt refinancing, the very foundations supporting current equity valuations could be undermined.
Howell has consistently projected the current bullish wave of liquidity is poised to peak around late 2025, meaning equity markets may already be operating on borrowed time before Trump’s deficit spending fully kicks in.
For equity investors, this represents a fundamental shift in market dynamics. When governments and corporations compete for the same pool of available capital to refinance maturing debt, the cost of capital rises and liquidity available for risk assets contracts. This typically translates to multiple compression in equity markets, regardless of underlying earnings growth. And on the latter, there’s some debate about whether earnings growth expectations need to be scaled back, too.
Federal Reserve’s limited arsenal
While investors consistently assume the Federal Reserve and Treasury Department will ride to the rescue during liquidity crunches, their ability to intervene faces significant constraints in the current environment.
The Federal Reserve’s traditional tool of quantitative easing – printing money to purchase government bonds – becomes politically and economically problematic when inflation remains above target levels. Any return to aggressive monetary expansion risks reigniting the inflationary pressures that dominated 2021-2022, potentially forcing the central bank to maintain higher interest rates for longer.
The Treasury’s options are equally constrained. Trump’s legislation includes raising the debt ceiling by US$4 trillion, but this merely provides borrowing capacity rather than solving the fundamental supply-demand imbalance in credit markets. The Treasury cannot create liquidity – it can only redistribute it by issuing new debt to fund operations.
More critically, both institutions face the same refinancing pressures as private sector borrowers. The federal government itself must roll over massive amounts of debt issued during the pandemic era, competing directly with corporations and other sovereign borrowers for scarce capital.
An equity market reckoning?
This liquidity framework suggests equity investors should prepare for a markedly different market environment than the one that prevailed during the post-pandemic recovery. The abundant liquidity that drove multiple expansion and supported growth stocks may give way to a more traditional value-oriented market where cash flow generation and balance sheet strength are prioritised.
High-growth technology companies that rely on continuous access to capital markets, as well as highly leveraged corporations facing their own refinancing needs are potentially the most vulnerable. Conversely, companies with strong cash generation and minimal debt maturities may outperform as liquidity becomes scarce – although all could produce negative returns.
The irony is stark: Trump’s pro-business tax cuts, designed to stimulate economic growth and corporate profits, may inadvertently undermine the very equity markets they’re intended to benefit by creating competition for capital at the worst possible moment.
Political vs. economic reality
The Trump administration contends that the legislation will reduce deficits by at least US$6.6 trillion over the next decade through increased tariff revenues, discretionary spending cuts, and regulatory reversals. However, this optimistic projection relies on economic growth rates and policy implementations that independent analysts think are unrealistic.
The Tax Foundation – the world’s leading nonpartisan tax policy 501(c)(3) nonprofit – believes Trump’s bill would increase the 10-year budget deficit by US$2.6 trillion on a conventional basis before added interest costs, suggesting the administration’s deficit reduction claims may prove illusory when confronted with economic reality.
For equity investors, the relevant question isn’t whether Trump’s policies will eventually generate economic growth, but whether financial markets can navigate the liquidity drought expected in 2026-2027. And history reveals liquidity trumps (pun intended) fundamentals in determining the short-to-medium term performance of the market.
Preparing for the storm
The convergence of Trump’s debt expansion with the next circa US$70 trillion global refinancing round presents equity investors with a challenge that may overwhelm traditional stock-picking or sector rotation techniques. The entire framework supporting current market valuations may shift if liquidity conditions tighten.
Investors would be wise to consider positioning for a world where access to capital, rather than earnings growth, becomes the primary determinant of market performance. This suggests favouring quality as well as growth, cash generation over leverage, and preparing for the possibility that even the Federal Reserve’s intervention capacity may prove insufficient when the debt wall arrives.
Of course, it’s all speculation at the moment because how investors respond, and what narrative they create, will ultimately determine the market’s direction. Either way, there are ways for equity investors to prepare for scarcity rather than abundance.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
