As we’ve discussed over the past week, tailwinds are building for stocks just as we’ve made new record highs in the major indices.

We now have the budget bill passed, and it will have an immediate incremental growth impact on the economy.  The full expensing provision (retroactive to the start of the year) will incentivize companies to research, develop and build now.

So, we’re getting fiscal fuel, and we should be getting close to a resumption of the interest rate easing cycle (monetary fuel).

That said, it may come with or without Jerome Powell.  Last week Trump explicitly called for Powell to resign.  Today, Kevin Warsh, on Trump’s short list of candidates to replace Powell, was on TV calling for regime change at the Fed. 

Add to this, as we discussed last week, the risk of dysfunction in the Treasury market has been materially lowered now that the Fed has signaled that it will relax bank regulatory constraints.

So, the stars are aligning for a risk-on market environment, except for the overhang of the July 9th (self-imposed) tariff deadline.  But that self-imposed deadline has now been extended to August 1.

With all of this, let’s revisit this small cap vs. big tech chart we observed back in my June 23rd note (here). 

Remember, when Jerome Powell signaled the end of the tightening cycle in October of 2023 (a dovish pivot), both the Russell (small caps) and the Nasdaq (led by big tech) rose nearly 50% over the next 13 months. 

Then the Russell topped first, in late November last year, on the “reflation” fears of Trump policies, and the potential for a shallow easing cycle. 

We’ve since had the Fed pause.

We’ve had the tariff-fear induced broad sell-off across stocks. 

And now we’ve had a full V-shaped recovery for the Nasdaq and the S&P 500 (back to new record highs).  

But the Russell is still well below its record highs — it has dramatically underperformed since the Fed started signaling a pause of the easing cycle. 

That said, if you believe the Fed and Jerome Powell are feeling the heat, and the resumption of the easing cycle is coming, then the performance gap in the chart above should start closing aggressively.

I’ll be away the remainder of the week, so you will not receive a Pro Perspectives note from me.

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One of the key issues on the table: Europe’s capacity to carry out large-scale fiscal spending. 

They need to fund AI.  They need to fund defense.  And they continue to commit to the climate agenda. 

As we’ve discussed over the past several months, the trillion-dollar question remains:  Who will fund it? 

The inconvenient truth is that it can only happen if the ECB monetizes the debt — backstopping the sovereign bond markets, particularly in fiscally weaker member states.

But that approach only works if other major global central banks are moving in the same direction — coordinating for the sake of global financial stability.

Here’s the problem: Unlike much of the past 15 years, global governments and central banks are no longer aligned. Monetary policy is diverging. Shared global goals have given way to national interests.

This divergence will likely accelerate, especially when Trump hand-selects a new Fed Chair. And that could happen sooner than expected.  He called for Jerome Powell’s resignation today.

This is bad news for Europe.

On the funding front: As we’ve covered in recent notes, the new U.S. dollar stablecoin legislation sets up to attract fresh global capital into the U.S. Treasury market. And a stronger, more stable U.S. Treasury market means more global inflows — and that’s capital that won’t be funding Europe’s fiscal ambitions.

Add to that: As the burden falls on the ECB to buy its own debt, to stabilize European bond markets, the euro will pay the price.  That sets up the risk of capital flight out of Europe, and into safe havens like U.S. Treasuries.

Bottom line: This ECB Forum was a public airing of the structural flaws in the European Monetary Union. The same flaws that were exposed during the Global Financial Crisis — and nearly broke the union — are being exposed again as Europe attempts this large-scale fiscal expansion.

In the past two weeks, we’ve stepped through the tailwinds building for stocks, just as we’ve made new record highs in the major indices.

The resumption of the Fed easing cycle is nearing.  The extension of pro-growth tax cuts should be just weeks away.  The Fed has finally acknowledged the liquidity constraints its bank regulations have put on the U.S. Treasury market — and they’ve vowed to relax those constraints, and soon (regulatory relief!).  

Add to all of this, from last week’s NATO meeting we now have an historic structural shift in Western world military spending and alignment.

And the technology revolution continues to advance at a rapid pace.

The question is, could the self-imposed deadline on the 90-day tariff pause introduce another confidence shock?

That said, over the past several months, it has become clear that Trump can turn the dials at will — to manage economic and financial market stability.  And markets now seem to be recognizing that/ pricing it in. 

Add to this, last week’s NATO Summit (the big defense spending commitments) may end up playing a big role in the resolution of tariff negotiations. 

Remember, back in April we talked about Trump’s Chairman of the Council of Economic Advisors — a guy named Stephen Miran.  He wrote a report on “Restructuring the Global Trading System” in November of last year.  A month later, Trump picked him to be his top economist.

This report is the blueprint for leveraging tariff threats, and the United States’ role in global security and financial stability, to extract “burden sharing” from our allies and trading partners. 

In this case, the dollar’s role in the world as the reserve currency provides benefits to the world, and benefits to the U.S. but also drives persistent and unsustainable U.S. trade deficits.

So Miran’s message for trading partners was simple: Share the burden. That means accept tariffs, or… open your markets, spend more on defense, buy more American goods, invest in U.S. manufacturing, and buy our Treasuries.