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Tag along with tech stock gains and tempered tariffs... With under two weeks until the Trump Administration’s 01 August tariff deal deadline, both the S&P 500 Index and the tech-heavy Nasdaq Composite continue to flirt with and reach new closing and intraday highs. This has been propelled in part by generally cooler-than-expected inflation data, including last week’s benign CPI and PPI prints, which have yet to show any significantly negative impact from higher tariffs. Moreover, investors seem to be betting that changes to U.S. global trade policy, once finalized and implemented, won’t be as extreme as headlines and social media posts suggest.
…or consider reducing risk? The recent resurgence of technology-driven equity appreciation has brought with it frothy valuations both for tech-oriented sectors and the overall market. The S&P 500’s information technology sector is valued at roughly 30x forward earnings, while the overall index is at 22x — representing hefty premiums versus their respective historical averages. And while last week’s unofficial kickoff of second quarter earnings season showcased decent results, analysts have lowered their full-year earnings estimates for nine of the 11 sectors in the S&P 500.
With this in mind, how might investors who are struggling to reconcile continued potential upside for U.S. equities with a heightened degree of uncertainty (Figure 1) want to position their portfolios? One idea worth considering is incremental exposure to municipal bonds. The asset class continues to offer attractive yield and return potential, and recently breathed a sigh of relief as it retained its tax-exempt status despite other big changes to the federal tax code.
Investors struggling to reconcile equity upside with uncertainty may want to consider municipal bonds.
While we expect volatility to remain elevated, we’re confident munis can provide attractive levels of income.
Portfolio considerations
The recently enacted “One Big Beautiful Bill” (OBBB) left the tax-exempt status of municipal bonds intact, a key victory for the asset class. Preserving the exemption gives municipalities across the country a cost-effective way to finance essential infrastructure projects.
Another provision temporarily raises the cap on state and local tax (SALT) deductions, from $10,000 under the 2017 Tax Cuts and Job Act to $40,000 for the 2025-2029 tax years. The higher cap, which will reduce the tax burden of some residents in high-tax states, phases out for those earning more than $500,000. Jurisdictions with high local taxes could see taxpayers migrate to lower-tax states if the deduction cap reverts.
We further analyzed the OBBB through the lens of three main policies to determine the potential impacts on municipal issuers. The results suggest that some of the “beauty” of the OBBB may be in the eye of the beholder:
- Tariffs. Expanded aluminum and steel tariffs increase capital project and borrowing costs for municipalities. Electric, water and sewer utilities that need capital investment may pass higher construction costs on to customers via rate increases. However, more relaxed environmental regulations and enforcement might alleviate near-term cost pressures. Separately, port volumes may be pressured and are bracing for declines in shipping of raw materials and other inputs.
- Energy policy. The rollback of renewable energy and manufacturing tax credits could hinder energy production capacity and raise electric utility rates. Specifically, tax credits for solar and wind energy projects will no longer be available after 2027, making renewable power generation more expensive. Additionally, electric vehicle (EV) tax incentives will be phased out after September 2025, and tax credits for charging stations will expire after June 2026. This may dampen the momentum of planned city and state transitions to EV.
- Immigration. Federal funding is at risk for cities and counties identified as sanctuary jurisdictions. School districts with undocumented students could face enrollment declines. Large urban districts will likely be more vulnerable to losing students and federal K-12 aid cuts, and those that lose aid may have to issue additional debt to replace funding.
Despite some challenging aspects of the OBBB, municipal bonds continue to offer compelling yield and income benefits. Current yields of 4.03% for investment grade munis (ICE BofA U.S. Municipal Securities Index) rank in the 95th percentile over the past decade, while high yield munis are yielding 5.72% (S&P Municipal High Yield Index). Income has historically been the primary driver of muni total returns (Figure 2). Though market volatility will likely persist, municipal bonds remain well-positioned to deliver attractive income levels.
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.
Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. Nuveen, LLC provides investment services through its investment specialists.
This information does not constitute investment research as defined under MiFID.