After two months since ‘liberation day’, the market is now facing another economic surprise with Donald Trump’s budget bill. The bill, which passed the House of Representatives at the end of last month, aims to extend the administration’s attack on overseas investors. Section 899 of the bill is causing concern as it seeks to impose additional taxes on companies and individuals based in countries with punitive tax policies, including digital services taxes that could impact the UK.

Currently, taxes on US dividends received by overseas investors are set to rise by 5 percentage points per year, up to a maximum of 20 percent. This could have implications for individual UK investors who currently benefit from a reduced rate of 15 percent under the UK-US double tax treaty.

Earlier this year, Investors’ Chronicle highlighted the possibility of such tax increases, which was once considered unlikely but is now one step closer to reality. While there is still a chance for the proposal to be amended or watered down, investor nerves are being triggered by the uncertainty surrounding the bill.

Despite the market’s relaxed attitude towards threats, recent events have shown that trade tensions are impacting various sectors. The ISM Manufacturing index for May revealed a contraction, and steel and aluminum tariffs have been increased, affecting industries globally. The services index has also shown signs of contraction, with rising prices adding to concerns.

While ‘hard’ US data appears positive, bond and currency markets are displaying caution. The US dollar index has dropped by 9 percent this year, and long-term Treasury yields have risen significantly. This trend is not unique to the US, as bond markets in other regions have also seen increases in recent weeks.

Section 899 of the budget bill could further impact overseas investors, particularly in terms of Treasury holdings and corporate earnings. Taxes on corporate earnings and passive income are set to rise by 5 percentage points per year, affecting UK companies with significant US exposure.

As the bill progresses through the Senate, uncertainty looms over the market until the end of the year. The end of US exceptionalism is becoming increasingly apparent, signaling a shift in global investor sentiment. Despite the potential challenges ahead, the stock market remains optimistic, suggesting a disconnect between market sentiment and economic realities.