What’s in the Act for corporations?
The lion’s share of attention on the Act has focused on individual tax policies, and we reported on these in “Potential Opportunities and Fiscal Policy Takes Shape” (July 10, 2025). Yet, arguably, the corporate provisions should be the most meaningful for the 10 budget years through 2034. This report considers those provisions in light of our current investment guidance.
Several corporate provisions appear significant for revenue and earnings potential. First, companies may take bonus depreciation of 100% (up from 40%) and fully expense the cost of manufacturing structures. The Act also allows immediate depreciation for new manufacturing facilities, equipment, and software. Another provision allows the full expensing of research and development (R&D). These provisions aim to reaccelerate capital spending, including investment in artificial intelligence (AI), and to encourage onshoring. Both provisions apply retroactively to January 19, 2025.
One recent study from Piper Sandler projects that the Act would cut the effective corporate tax rate — accounting for expensing, deductions, and other tax benefits — from 21% to as low as 14%.1 Piper Sandler also notes that each time the effective federal tax rate has declined since 1980, U.S. capital expenditure (capex) has increased as a share of gross domestic product (GDP). Most recently, after the 2017 tax cuts, U.S. real capex growth increased from 4% to 7.5% prior to the pandemic.
Finally, the Act makes the tax deduction of up to 20% for qualified business income permanent. This deduction can lower the tax liability for eligible self-employed individuals and small-business owners with companies that are structured as pass-through entities.
Potential market impact of the tax cuts
The fact that capex and R&D expensing is retroactive to January 19, 2025, should allow firms to realize savings from their 2025 returns. Moreover, decision-making for 2026 can fully incorporate the full-year potential savings as a benefit from potential new projects. Cash flow potentially could grow between 2025 and 2026.
We believe that the Act will help drive capital investment and corporate earnings over time. However, two notes of caution are appropriate. First, we believe much of the additional cash will spur more capital spending to develop AI tools. However, we expect that many non tech companies will pause capital spending plans until they can see how tariffs may affect their costs, pricing, sales, and, ultimately, their need to expand.
Second, the boost to earnings from added investment may take longer to develop than the increase in free cash flow (the amount of cash that a company has left over after it has paid all of its expenses, including investments). Most companies report earnings according to the General Accepted Accounting Procedures (GAAP), which amortize capital spending. Over time we expect higher earnings growth as these projects eventually begin to reduce costs and increase output. Based on rates of capital spending, the Information Technology (IT), Consumer Discretionary, Communication Services, and Industrials sectors may benefit the most. Our investment guidance currently favors the IT sector.
Chart 1 shows an estimate of U.S. nonresidential building starts, indexed to June 2009. The index had a modest but sustained bump up after the 2017 tax cuts, directionally consistent with the Piper Sandler results referenced above. The chart also shows a comparatively larger and sustained capital spending increase after the pandemic, likely reflecting federal subsidies under the Inflation Reduction Act and the more recent data center build-out.
Chart 1. Surge in U.S. nonresidential building starts extends to a 16-year high
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data, June 2009 – June 2025. The line shows the FW Dodge construction index of new construction activity (starts) in U.S. residential and nonresidential building divided by an index of U.S. residential housing starts as a proxy for the residential building starts included in the Dodge index. The division effectively isolates the nonresidential component.
With those episodes for comparison, the latest point on the chart (June 2025) is the highest of the period. We want to be careful not to assume too much. The June 2025 surge is just one month, and tariff-related cost increases dampen expansion plans at non tech companies. Still, the June surge is consistent with a larger corporate response than after TCJA because the Act’s provisions are permanent, not temporary, as they were in 2018. Also, company guidance broadly suggests strengthening in tech-related capital spending through next year.
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The nonpartisan Tax Foundation estimates that the total impact of the Act will be to increase GDP growth by 0.2% in 2025 and stabilizing at 1.2% extra per year by 2034.
In the same analysis, the Tax Foundation estimates that the largest, single corporate contribution to GDP will be the 100% bonus depreciation.
Source: “One Big Beautiful Bill Act Tax Policies: Detail and Analysis”, July 4, 2025.
1 “Soft Patch End in Sight,” Piper Sandler, June 29, 2025.
Decreasing spending
The Congressional Budget Office (CBO) estimates that the Act will add more than $4 trillion to the deficit, which includes $718 billion in additional debt financing between 2025 and 2034.2 The Act’s basic math is straightforward, decreasing spending $1.1 trillion on a number of government programs (including Medicaid and SNAP) and clean-energy tax provisions while increasing military and national-security spending. These cuts transfer costs to the states, and we anticipate short-term budget disruptions that may be difficult for some states to make.3
Raising revenues
While the CBO is estimating expenses on a 10-year timeline, it can be difficult to project how the economy may dynamically adjust to the prospect that higher government borrowing costs also should raise private borrowing rates. Tariff revenue is not part of the 10-year budget calculations, but planners in the White House and in Congress have mentioned tariff revenue as a potential offset.4 But tariff policy itself has been changeable through U.S. history, and a future Congress and presidential administration may change tariff policy significantly.
Even if the implementation of tariff policy were transparent and predictable into the future, there would likely still be significant swings in revenue generation. Tariffs are a tax, and consumers typically respond to higher taxes by finding substitutes subject to lower tariffs. As consumers substitute away from foreign-sourced goods, tariff revenue should fall. As we have discussed in a previous report, most major corporations have also developed nimble supply chains and may shift with high tariffs, resulting in less revenue than expected.5 In Chart 2, the 2025 tariff revenue spike almost obscures the fact that tariff revenue following the 2018 tariff increased quicky but then faded, likely as households and businesses made adjustments. We believe that tariffs will generate revenue, but how much and over what time frame remains to be seen.
Chart 2. Evolution of tariffs since President Trump’s first term
Sources: Bloomberg and Wells Fargo Investment Institute as of May 31, 2025. Tariff revenue measured by U.S. Treasury federal budget net receipts from customs and is a monthly value. Effective tariff rate is an approximate value.
Conclusion
When looked at from a revenue versus expenses lens, the projected deficit increases are significant. We do not believe that even estimates (such as those cited by the Tax Foundation) can accurately capture how businesses and households will respond to avoid higher prices due to tariffs. The deficit increase is significant with or without tariffs, but projecting the total debt and the cost of financing it remains challenging.
Congress appears to be targeting further spending cuts later this year, once the government’s new fiscal year begins on October 1. However, we do not expect that any additional cuts for the 2026 budget will close the wider deficit and funding costs that the CBO projects for 2025 – 2034.
We also expect that the U.S. Treasury will increase its issuance of Treasury bills and reduce its sales of longer-term notes and bonds. The Treasury also used this strategy between 2023 and 2024 in order to support the prices of notes and bonds by reducing their supply. We anticipate wide swings in long-term U.S. Treasury bond yields while investors weigh the growing deficits and finance costs.
Those swings could become more pointed if, as we expect, economic activity slows under higher borrowing costs and tariff revenue is more modest. As of August 11, the 4.88% 30-year U.S. Treasury bond yield was almost unchanged from where it finished 2024, at 4.78%, but in the nearly 7½ intervening months, the yield covered a range of nearly three-quarters of a percentage point. For comparison, more generally, swings in Treasury bond yields since 2022 are nearly double their average from 2011 through 2021.6 Our guidance underweights long-term fixed income in anticipation of further uncertainty around future yields.
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The Congressional Budget Office estimates that the Act will increase the federal deficit by $4.1 trillion, which includes debt service costs of $718 billion, over the 2025 – 2034 decade.
Source: “Effects on Deficits and the Debt of Public Law 119-21 and of Making Certain Tax Policies in the Act Permanent,” Congressional Budget Office, August 4, 2025.
The Tax Foundation estimates 10-year revenue of $2.3 trillion, without accounting for any negative effects of the tariffs on economic growth, but $1.5 trillion after these adjustments.
Source: Tax Foundation, August 1, 2025. “Trump Tariffs: Tracking the Economic Impact of the Trump Trade War.” These estimates do not account for retaliatory tariffs that other countries may apply to U.S. goods.
2 “Effects on Deficits and the Debt of Public Law 119-21 and of Making Certain Tax Policies in the Act Permanent,” Congressional Budget Office, August 4, 2025.
3 For more on the impact of federal Medicaid (and other) cuts, please see our report, “U.S. State Sector: Budgets May Become More Challenging,” May 7, 2025.
4 Eleanor Pringle, “In Trump’s Year of Cost-Cutting and Efficiency, National Debt Soars Past $37 Trillion,” Forbes, August 13, 2025.
5 An August 2024 Federal Reserve study found that the 5.5% increase in U.S. imports from Canada, Mexico, and rapidly industrializing Asian economies (India, Taiwan, South Korea, and Vietnam) matched the 5.1% decline in China’s share of U.S. imports between 2017 and 2022. For details, see Trang Hoang and Gordon Lewis, “As the U.S.Is Derisking from China, Other Foreign U.S. Suppliers Are Relying More on Chinese Imports,” FEDS Notes, August 2, 2024.
6 As measured by the ICE Bank of America MOVE Index, which tracks a basket of over-the-counter options on U.S. 2-, 5-, 10-, and 30-year constant maturity interest rate swaps.
Mapping the economy’s trajectory amid crosscurrents
For now, fiscal policy is tracking with our expectations as the Act is poised to provide moderate additional stimulus — likely equivalent to less than 0.5% of GDP.7 If anything, the number of Act provisions retroactive to 2025 resulted in slightly greater and more front-loaded tax cuts than we anticipated:
- The Act’s individual tax provisions should provide a meaningful lift to tax refunds during next year’s first quarter, bolstering consumer purchasing power at a time when we believe the economy will be slowing because of a more drawn-out tariff implementation.8
- We view the investment tax cuts as well as the increased child tax credit as the most growth-enhancing provisions in the Act.
Further, we believe these economic stimulus provisions in the Act will help counter the negative tariff impacts gradually working through the economy. Tariff implementation has been spread out over the past several months, and more tariffs are likely in the balance of the year. The likely impact should be a similarly extended sequence of higher tariff-driven inflation and then slower economic growth into early 2026. Fortunately, we think that short-term interest rates will fall, tax refunds will rise, business spending will quicken, and, on balance, the economy will gain momentum through 2026. The cumulative effects of deregulation also should support growth.
Eyeing the deficit impact
Although we doubt that tariff revenue will be as strong as the Trump administration projects over the coming 10 years, the 2025 – 2026 time frame should generate significant tariff revenue before households and businesses completely adjust their spending to avoid tariffs. Longer-term, however, we believe that tariff revenue will fall short and, thereby, widen the federal deficit further.
The important point, we believe, is that — tariff revenue or no — widening government deficits likely will siphon a portion of aggregate U.S. savings to service government debt and away from economic growth. The CBO projected last January — prior to this year’s policy initiatives — that budget deficits should average more than 6% of GDP in the decade ahead. That’s nearly double the deficits averaging about 3.5% in the 20 years before the coronavirus pandemic.
Investment implications
The corporate provisions of the Act should reinforce capital spending in sectors that have substantial building projects, especially in technology-related sectors, but tariffs and a slowing economy create near-term volatility risk for the broader S&P 500 Index. To illustrate, as of August 13, the tech-related sectors (IT and Communication Services) of the S&P 500 Index had four-quarter earnings growth of 22.6% while the remaining nine sectors managed only 2.7%. The latter group represents more than half the weight of the S&P 500 Index and likely will remain vulnerable to tariff impacts through early 2026. Our investment guidance tilts toward selectivity and quality (strong balance sheets and earnings and profits that are resilient to economic conditions) in capital markets.9 Specifically:
- Currencies: We prefer U.S. assets since we think higher tariffs ultimately will be more detrimental to overseas, trade-sensitive currencies. We believe the greenback will find its footing through 2026 after bouts of near-term weakness, in sync with strengthening U.S. economic growth and attractive interest rates.10
- Fixed income: We expect Treasury yields to remain volatile, driven by a choppy period of economic data and the prospect of rising federal deficits. We emphasize selectivity and prefer intermediate maturities (typically between three and seven years). We remain cautious on longer-term bonds and would hold allocations below strategic levels amid near-term inflation variability and the potential for rising long-term U.S. government borrowing costs.
- Commodities: We still believe commodities can add portfolio diversification as they did during the first-quarter equity-market weakness. However, we see only limited upside until global economic growth gains more traction. The potential opportunities appear more attractive to us in equities.
- Equities: We believe that a period of near-term chop in equity markets is still consistent with a preference for U.S. Large Cap Equities and Mid Cap Equities over U.S. Small Cap Equities and international markets. The new business tax provisions discussed here reinforce this guidance.
Still, we favor trimming profits in large caps while maintaining an overweight position. We offer additional thoughts on selected equity sectors below:
- Utilities (favorable): Although this sector may come under near-term pressure from the Act’s phaseout of several Inflation Reduction Act investment and production incentives, we view strong AI-related power demand and the stability during macroeconomic stress as comparatively stronger fundamental factors.
- IT (favorable): As a research- and capital-intensive sector, IT should benefit from full expensing of R&D, capital equipment, and factory structures.
- Industrials (neutral): The Act’s expensing, R&D, and depreciation features are potential positives for this sector, but other headwinds temper our outlook, including the economy’s slowdown, additional tariffs, and other expansion-related problems (like limited skilled labor and rising raw-materials prices).
- Consumer Discretionary (unfavorable): The sector should benefit from the individual tax changes, but we expect larger, negative factors from new automobile tariffs and from the Act’s phaseout of most Biden-era clean-energy tax breaks. Rich valuations also leave us unfavorable on the sector.
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The CBO estimates that by 2034 the Act will increase federal debt held by the public from 117% of GDP (in the CBO’s January 2025 baseline estimate) to 127% under the Act by 2034.
Source: “CBO Estimates the Fiscal Impact of the One Big Beautiful Bill,” American Action Forum, August 6, 2025.
Deregulation’s impact on business expenses and productivity growth is becoming apparent from the $75 billion in regulatory savings through early July, according to the American Action Forum, reversing last year’s $1.4 trillion in regulatory costs.
7 Paul Kiernan, “Economic Fallout Will Be Muted at First,” The Wall Street Journal, July 5, 2025.
8 For more detail on our economic forecasts, see ‟Adjusting our 2025 and 2026 Targets,” Wells Fargo Investment Institute, July 30, 2025.
9 For complete details on our recent guidance adjustments, please see, “Adjusting Portfolio Guidance and Allocations,” August 5, 2025.
10 For more on our U.S. dollar outlook, see “Investment Strategy: U.S. Dollar Down, But Not Out,” July 7, 2025, and “Special Report: The U.S. Dollar’s Future as an International Currency,” May 29, 2025.
