Quarterly Market Currents: Navigating the Big Beautiful Bill and Market Highs
Last quarter, we described markets as being caught between tariffs, tumult, and tax alpha — a reminder that volatility and opportunity often arrive hand in hand. As we step into Q3, the story feels no less dramatic. U.S. large-cap stocks have raced to all-time highs, yet valuations now echo the exuberance of past market peaks. Meanwhile, the sweeping One Big Beautiful Bill (OBBB) is rewriting the playbook for both climate-focused strategies and the broader fixed income landscape, even as liquidity pressures push endowments and institutions to shake up private market allocations. This quarter, we’re exploring the tension between equity market jubilation and prudent investing: where momentum can still work in investors’ favor, and where the undercurrents of valuation, policy shifts, and structural market changes demand a more measured hand.
The Precarious Balance of Stock Market Euphoria and Prudence
Despite a rocky start to Q2, U.S. large-cap stocks (as measured by the S&P 500) delivered a strong 10.9% return, pushing the index to new all-time highs. While record highs are often cause for celebration, we are monitoring risks lurking just beneath the surface. Chief among them is valuation: the S&P 500’s forward price-to-earnings (P/E) ratio reached 22.0x at the end of June, a level not seen since the euphoric stretch of late 2021 and, before that, the Dotcom bubble of the early 2000s.
Forward P/E is a widely used valuation metric that compares a company’s share price (“P”) to its expected earnings over the next twelve months (“E”), with higher multiples signaling more expensive stocks. Historically, there is a clear negative relationship between elevated forward P/Es and subsequent equity returns—an insight borne out in the chart below, where 22.0x is highlighted in red.
The last two times the S&P 500 reached this level of valuation were followed by significant and extended drawdowns: a roughly 25% decline from the January 2022 peak, and a nearly 50% drawdown following the Dotcom peak in 2000. While momentum may carry markets higher in the near term, valuations at these levels have historically signaled elevated downside risk (as shown in the negative correlations in the chart below)—impossible to time, but critical to manage.
Source: FactSet, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management.
By contrast, non-U.S. developed equities (represented by the MSCI EAFE Index) continue to trade at far more reasonable valuations, with a forward P/E of 14.7x as of June. This substantial discount relative to U.S. large caps reflects structural differences in sector composition and investor positioning, but it also presents a more attractive starting point for long-term returns. Many developed international markets—including countries like Germany, the Netherlands, and Japan—demonstrate stronger national commitments to climate policy and sustainable development, aligning well with Align’s impact-focused investment approach. Combined with more balanced market leadership, growing exposure to clean technology and industrial innovation, and the tailwind of a weakening U.S. dollar, we are increasingly constructive on the opportunity set in non-U.S. developed equities—for both their relative value and their alignment with global impact leadership.
Winners and Losers from the Big Beautiful Bill
The recently enacted One Big Beautiful Bill (“OBBB”) creates a distinct set of winners and losers within impact-focused portfolios. Winners include climate-tech innovators and early-stage businesses positioned to capitalize on the bill’s permanent extension of full expensing for short-lived assets and R&D, which is expected to accelerate investment into technologies supporting decarbonization, resilience, and the circular economy.
Developers with shovel-ready solar and wind projects able to meet the new, accelerated deadlines—construction by 2026 or operational by 2027—also stand to benefit in the near term. States with strong local clean-energy mandates and incentives may offset federal rollbacks, preserving opportunity sets for infrastructure and transition-oriented strategies. However, the bill’s projected addition of $2.8 trillion to the federal deficit through 2034 raises the prospect of higher long-term interest rates, favoring strategies less exposed to rate-sensitive fixed-income instruments. (Tax Foundation, 2025; Facet Wealth, 2025)
Losers are concentrated in sectors heavily reliant on long-dated federal incentives for clean energy deployment. The bill accelerates the expiration of key tax credits for wind, solar, and EVs—previously expected to run through 2032, these now require action by 2026/2027 for renewables and end after Q3 2025 for EVs. This could curtail the medium- and long-term pipeline of renewable energy projects and disproportionately impact developers in less supportive policy environments.
Princeton’s ZERO Lab projects a reduction of 820 TWh of clean electricity by 2035 and household energy cost increases of 7.5% to 13%. Fixed-income strategies targeting affordable housing, green bonds, and community development finance may also face headwinds as rising rates compress margins and slow deployment. Additionally, the bill’s rollbacks on NEPA and other environmental safeguards could introduce heightened risks for strategies aligned with biodiversity, water, and environmental justice objectives.
Our investment underwriting process has always centered on mobilizing capital toward areas of greatest need. In the wake of these momentous shifts, we are actively reassessing how and where client capital can be most effectively positioned to support financially resilient, high-impact solutions. (Observer, 2025;Energy Innovation, 2025;Latham & Watkins, 2025;National Wildlife Federation, 2025)
Fixed Income Investing in a Deficit-Driven US
The fiscal implications of the One Big Beautiful Bill arrive at a moment of mounting pressure on the U.S. government’s credit standing. The first major warning came in August 2023, when Fitch Ratings downgraded U.S. sovereign debt from AAA to AA+, citing rising fiscal deficits, mounting interest costs, and ongoing political dysfunction. That pressure intensified in May 2025, when Moody’s followed suit, cutting the U.S. credit rating from Aaa to Aa1 and removing the country's final top-tier designation. The passage of OBBB—which adds an estimated $2.8 trillion to the federal deficit through 2034, largely from permanent tax provisions and front-loaded incentives—has further fueled concerns over fiscal sustainability (Tax Foundation, 2025). The U.S. debt-to-GDP ratio is now projected to exceed 130% by 2034, straining investor confidence and global perceptions of creditworthiness.
For fixed income investors, these developments carry material consequences. Larger deficits mean increased Treasury issuance, which may push long-term interest rates structurally higher and introduce greater rate volatility. Following the Moody’s downgrade, yields on long-dated Treasuries briefly spiked—with the 10-year surpassing 4.5% and the 30-year exceeding 5.0%—as markets repriced the risk premium on U.S. debt (Business Insider, 2025). In this environment, interest rate (duration) exposure becomes more vulnerable, in particular. At the same time, structurally higher yields may open opportunities in shorter-duration credit, private debt, and real-return strategies. Additionally, greater fiscal uncertainty in the U.S. strengthens the case for non-U.S. fixed income diversification—particularly in countries with stronger fiscal positions, less correlated rate cycles, and more stable sovereign credit profiles. As the U.S. fiscal outlook becomes an increasingly central market driver, global diversification, quality credit selection, and active duration management will be our essential tools for navigating the road ahead.
Endowments Shaking up the Secondary Market
Even the most well-resourced institutions are facing liquidity headwinds—prompting a surge in secondary market activity as a means to rebalance and reallocate. University endowments, including Harvard and Yale, have announced plans to sell billions in private equity holdings, with Yale’s contemplated transaction expected to total $2.5–3 billion—one of the largest university-led sales to date.
While once viewed as passive holders with patient capital, these institutions are now using secondaries as an active portfolio management tool—responding to rising costs, legal uncertainties, and a sharp increase in the excise tax on large endowments under the One Big Beautiful Bill, from a flat 1.4% to as high as 8%. This shift follows the example set by large institutional investors such as CalPERS and CDPQ, which have used secondaries to manage private market exposure at scale. Endowments and foundations accounted for 10% of the $89 billion in limited partner-led secondary volume in 2024, up from 8% the prior year, according to Evercore’s FY 2024 Secondary Market Review.
This activity is part of a broader expansion in the secondaries market. Global transaction volume reached $162 billion in 2024 across all deal types, including $87 billion in limited partner-led transactions—40% of which came from first-time sellers. Pricing also improved: limited partner-led deals averaged 89% of net asset value, up 4 percentage points from the prior year, with buyout and credit portfolios pricing near 94% and 91%, respectively.
As the market continues to deepen and institutionalize, secondaries are increasingly viewed not just as liquidity outlets, but as strategic tools for managing exposure, recycling capital, and enhancing flexibility across private asset portfolios. For non-institutional investors who have proactively managed liquidity planning, or simply have capital available and the profile to bear illiquidity risk, this environment presents a compelling opportunity to access high-quality, diversified private assets at a discount. As institutional activity continues to reshape the secondaries landscape, we see a growing role for thoughtful allocators to engage opportunistically, particularly where long-term capital and selectivity can be an advantage.
Disclaimer: The information on this page contains opinions, which should not be interpreted as factual statements. This material is provided for informational purposes only and should not be construed as investment advice. There is no guarantee that the views and opinions expressed in this material will come to pass. Investing involves the risk of loss and may not be suitable for all investors.
