Investors should be aware of the implications of the One Big Beautiful Bill Act (OBBBA) that took effect on January 1, 2026. There are four key longer-term ramifications and investment opportunities associated with the OBBBA.
#1: Large deficits remain
High deficits are here to stay. A wider deficit could keep long-term rates high, put pressure on the dollar, and increase investor demand (including from central banks) for alternative sources of resilience (e.g., gold) to further diversify away from U.S. Treasuries. Higher rates will also keep debt financing costs elevated for businesses.
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Historical Sector Leadership Rotations
#2: Defense industries benefit
The OBBBA supports earnings growth for the Aerospace & Defense industry through a significant $150 billion increase in defense spending. The OBBBA also includes specific callouts for Artificial Intelligence (AI), next-generation 5G/ 6G technologies, and quantum computing.
More funding for traditional and innovative defense initiatives, combined with better tax treatment for R&D investment, and heightened conflicts around the world, mean that defense firms may continue to outperform the market, as they have since the election.
#3: Growth forecasts reduce recession fears
The broader tax-cut measures may increase consumption. More consumer-oriented tax cuts (no taxes on tips/overtime, a deduction for seniors, and a higher cap on the state and local tax [SALT] deduction) may also help offset the drag from tariffs.
Following the 3Q 2025 GDP growth of 4.4%, consensus growth estimates for 2026 have been revised higher. Historically, sectors such as Information Technology, Financials, Consumer Discretionary, Communication Services, Industrials, and Energy typically perform well.
#4: Small caps get support
Small-cap stocks have lagged large-cap stocks by 10% and 37% over the past year and three years, respectively. Small caps have seen earnings-per-share growth (EPS) decline over the past three years (-28%), while large caps have enjoyed strong EPS growth (+9%). Small caps’ bottom line could benefit from the OBBBA’s change to the maximum deductible business interest expense.
To be clear, this change is unlikely to suddenly close the gap between large- and small-cap stocks from a return and growth perspective. Large caps have multiple tailwinds, including big Tech. However, the change provides fundamental support for small caps at a time when the percentage of Russell 2000 companies with negative earnings remains near record highs.
Mark Notes
The OBBBA provides the biggest relief to low-income families. The bill will cut taxes for Americans earning under $50,000 by 14.9%, with 66% of the bill’s tax cuts benefiting families earning less than $500,000. Ultimately, no one knows how the tax landscape will evolve. However, OBBBA pro-growth policies are designed to prioritize Main Street, then Wall Street.
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This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.