By Teresa Rivas

The Republican tax and spending bill has its critics, from Elon Musk to bond vigilantes concerned with the deficit. Some investors may find themselves in that camp, too.

The bill squeaked through the House of Representatives on May 22 with a single vote. If the Senate, where the GOP has a majority, passes an amended version, it will have to return to the lower chamber for another vote.

But economists and strategists see problems on several fronts with the bill as it stands now. They see a risk of inflation; a diminution of bonds' value as a hedge against losses in equities; and trouble for managed-care stocks and solar power, with gains for defense. Then there is the surge in borrowing it would require: Musk described the legislation as an abomination on Tuesday.

TS Lombard chief economist Freya Beamish argued Wednesday that while globalization had put companies, rather than workers, in the drivers' seat in recent decades, allowing profits to expand ahead of wages, that narrative could flip.

As it stands, the House bill allocates more than $150 billion for border security and immigration, meaning Immigration and Customs Enforcement would be among the best-funded federal law enforcement agencies, while the administration's "rhetoric also continues to point to disruption in the labour force," she wrote. Increased arrests suggest "that the building blocks to faster deportations are moving into place" as the bill advances.

A scarcity of labor could lead to wage gains and damage profits and growth in gross domestic product, she said. "This will erode the nice relationship...in the post-90s era, which is driven by profits," she wrote. "Investors operating off this relationship will gradually become less right and eventually wrong."

An era of inflation in wages will slowly push bond yields higher, sending prices lower and making fixed-income investments less effective as a tool for offsetting losses in shares. "It will take a long time for it to become clear that the hedging capacity of bonds for equities has truly deteriorated and that profit growth in this cycle will pale as compared to the experience from the 1990s onwards," she wrote.

Aniket Ullal, head of exchange-traded fund research at CFRA, warned of consequences in specific sectors. Not all of those are bad for corporations: The bill proposes some $150 billion in new mandatory funding to reinforce national defense. That would be good for Lockheed Martin, Huntington Ingalls Industries, General Dynamics, Northrop Grumman, RTX, Boeing, and L3Harris Technologies.

Still, the picture looks less rosy elsewhere. The House bill includes several health care-related provisions that will affect hospitals and managed-care organizations serving Medicaid patients, he said.

A Medicaid restructuring could be less than ideal for companies like Centene, Molina Healthcare, UnitedHealth Group, and Elevance Health. Shifting costs to hospitals looks like a headwind for companies like HCA Healthcare, Tenet Healthcare, and Universal Health Services, Ullal said.

Not surprisingly, clean energy is also a target. Ullal wrote that while pushback in the Senate is likely, at the moment the bill prohibits wind and solar projects from entering leasing arrangements with third parties. New nuclear projects wouldn't be subject to these changes, but would still need to begin construction by year-end 2028.

"For rooftop solar installers, new restrictions would be adopted for leasing models, a serious threat to firms like Sunrun," he wrote.

Then there is the federal budget deficit to consider. The bill is estimated to add at least $2.5 trillion to the national debt over 10 years. That is making investors antsy, as the weakness of demand at the May 22 auction of Treasury debt shows.

Lombard's Beamish is concerned about the debt, too. The increased borrowing the bill would require would hit the market at a time when there is less demand. To sell its debt, the Treasury would likely have to pay higher rates of interest, and those bigger payouts would put even greater strain on the budget. Keeping the rate of growth in the debt in check would be even harder.

While it remains to be seen what changes the Senate makes, it is clear that the bill is one that investors have to monitor.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 04, 2025 15:09 ET (19:09 GMT)

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