To The Moon

President Trump’s “Big Beautiful Bill” is a fiscal adrenaline shot for the U.S. economy and by extension, the stock market.

President Trump's "One Big Beautiful Bill" (OBBB) is designed to stimulate the US economy and, by extension, the stock market, primarily through a combination of substantial tax cuts and spending reductions. A key aspect of the bill is a significant cut to corporate and individual taxes, aiming to boost corporate earnings and encourage investment.

In this article I would like to discuss how the bill could lift equities in the short to medium term.

Corporate Tax Cuts = Earnings Boost

• Extension of 2017 tax cuts means lower effective tax rates for corporations.

• 100% expensing for capital investments encourages business spending.

• Result: Higher after-tax profits → upward revisions in earnings estimates → bullish for stock prices, especially in industrials, tech, and consumer discretionary.

Consumer Spending Tailwind

• Tax deductions for tips and overtime, plus a $6,000 tax break for older adults earning under $75K, put more cash in consumers’ pockets.

• Retail, travel, and leisure stocks could benefit from increased discretionary spending.

Defense & Infrastructure Surge

• $350B earmarked for defense and border security, including the “Golden Dome” missile shield.

• Defense contractors (e.g., Lockheed Martin, Raytheon) and infrastructure plays (e.g., Caterpillar, Vulcan Materials) may see revenue tailwinds.

Regulatory Rollbacks & Energy Push

• Suspension of Biden-era climate policies and fast-tracking of fossil fuel projects could lift traditional energy stocks.

• Reduced green energy incentives, however, may pressure clean tech names in the short term.

But… Long-Term Risks Linger

• The bill adds $3.3–$7 trillion to the national debt over the next decade.

• Moody’s has already downgraded U.S. credit amid rising debt concerns.

• If bond yields spike in response, growth stocks and rate-sensitive sectors could face headwinds.

Strategic Angle for Investors

• Short-term winners: Defense, retail, industrials, fossil fuels.

• Caution flags: Clean energy, healthcare (due to Medicaid cuts), and long-duration tech if yields rise.

Trump’s “Big Beautiful Bill” is a fiscal jolt that reshapes sector dynamics—and ETF positioning. In the next section, I would like to examine the sector-by-sector breakdown with ETF ideas that could ride the wave.

Defense & Aerospace

Catalyst: $350B in defense spending, including missile shield and border security Potential Beneficiaries:

• Lockheed Martin, Raytheon, Northrop Grumman

• Border tech and surveillance firms

ETFs to Watch:

• $iShares U.S. Aerospace & Defense ETF(ITA)$

• $SPDR S&P Aerospace & Defense ETF(XAR)$

Industrials & Infrastructure

Catalyst: Bonus depreciation, capital investment incentives Potential Beneficiaries:

• Caterpillar, United Rentals, Vulcan Materials

• Railroads and logistics firms

ETFs to Watch:

• $Global X U.S. Infrastructure Development ETF(PAVE)$

• $Industrial Select Sector SPDR Fund(XLI)$

Energy (Traditional)

Catalyst: Rollback of climate regulations, fast-tracked fossil fuel projects Potential Beneficiaries:

• ExxonMobil, Chevron, Halliburton

• Pipeline and LNG infrastructure

ETFs to Watch:

• $Energy Select Sector SPDR Fund(XLE)$

• $Alerian MLP ETF(AMLP)$

Consumer Discretionary

Catalyst: Tax breaks for tips, overtime, and seniors = more spending power Potential Beneficiaries:

• Nike, Wayfair, RH, On Holding

• Travel and leisure stocks

ETFs to Watch:

• $Consumer Discretionary Select Sector SPDR Fund(XLY)$

• $SPDR S&P Retail ETF(XRT)$

Healthcare (Caution Zone)

Catalyst: Medicaid work requirements and spending cuts Potential Headwinds:

• Medicaid MCOs (e.g., Centene, Molina)

• Rural hospitals and safety-net providers

ETFs to Monitor:

• $iShares U.S. Healthcare Providers ETF(IHF)$

Clean Energy (Under Pressure)

Catalyst: Suspension of green subsidies and climate mandates Potential Headwinds:

• Solar, wind, and EV infrastructure firms

ETFs to Monitor:

• iShares Global Clean Energy ETF (ICLN)

• Invesco Solar ETF (TAN)

Strategic Angle

• Short-term bullish: Defense, industrials, energy, retail

• Neutral-to-bearish: Healthcare and clean energy (until policy clarity returns)

In the following section, I will be drilling into $iShares U.S. Aerospace & Defense ETF(ITA)$ , a prime beneficiary of Trump’s “Big Beautiful Bill” and then build a rotation strategy that balances its upside with sectors resilient to rising yields and fiscal volatility.

Why ITA Now?

• Direct beneficiary of $350B defense spending in the bill

• Low beta = cushion against macro shocks

• High-quality holdings with pricing power and government contracts

Rotation Strategy: Balancing Tailwinds & Yield Risks

Tactical Allocation (Sample Tilt)

In this section, I will break down the technical setups and tactical timing for both iShares U.S. Aerospace & Defense ETF (ITA) and SPDR S&P Aerospace & Defense ETF (XAR) as of early July 2025. These two ETFs offer different exposures—ITA is cap-weighted, while XAR is equal-weighted which creates distinct momentum and rotation dynamics.

Technical Comparison: ITA vs. XAR (as of July 3, 2025)

Interpretation:

ITA is in a confirmed breakout with strong trend strength (ADX > 25) and MACD momentum. However, RSI is overbought, and volume is light—suggesting a potential pause or pullback.

XAR is approaching resistance but with more balanced momentum. Its equal-weight structure gives it broader exposure to mid-cap names like AeroVironment and Rocket Lab, which may outperform in a risk-on rotation.

Tactical Timing Strategy

Bonus Insight: Divergence Watch

If ITA stalls near $188.50 while XAR breaks above $211.50, it could signal a rotation from large-cap to mid-cap defense—a classic late-cycle move.

Conversely, if XAR underperforms while ITA holds trend, it suggests institutional preference for stability amid fiscal uncertainty.

I think that if we were to do a paired trade strategy, we could use ITA (iShares U.S. Aerospace & Defense ETF) and XAR (SPDR S&P Aerospace & Defense ETF), using their technical divergence, volatility, and weighting structure to create a tactical long/short setup.

Paired Trade Thesis: ITA vs. XAR

Interpretation: ITA is extended and overbought, while XAR has room to run. This sets up a mean-reversion or rotation trade: short ITA, long XAR.

Simulated Paired Trade Setup

• Net Exposure: Market-neutral (beta-adjusted)

• Expected Return: ~+3.5% on spread if targets hit

• Catalyst: Rotation into mid-cap defense names (XAR) as ITA consolidates

Risk Management & Exit Strategy

Monitor RSI divergence: If XAR RSI > 75 and ITA RSI < 65, unwind trade

Watch volume: If XAR breaks $211.50 with strong volume, consider adding to long leg

Macro trigger: If defense budget expands further or geopolitical tensions rise, both legs may rally—tighten stops to protect capital

In the next section, I would like to simulate the ITA–XAR paired trade over the past 30 days and apply a volatility-adjusted position sizing model to manage risk and optimize exposure.

30-Day Paired Trade Backtest (June 3 – July 3, 2025)

Result: A long XAR / short ITA trade would’ve returned ~3.2% net (unleveraged) over 30 days, with modest drawdown and a favorable Sharpe-like profile. The spread widened steadily, confirming the rotation from large-cap to mid-cap defense.

Volatility-Adjusted Position Sizing Model

We will use the Percent Volatility Model, which sizes positions based on each ETF’s volatility to equalize risk.

Inputs:

• Account Risk: 1% of $100,000 = $1,000

• Volatility (σ): ITA = 4.9%, XAR = 6.6%

• ATR Proxy: Assume 14-day ATR = 2.45 (ITA), 3.10 (XAR)

• Stop Distance: 1× ATR

Position Size Formula:

{Position Size} = frac{{Account Risk}}{{ATR} \times {Share Price}}

Net Exposure: ~$165 long bias (XAR heavier), but risk-balanced due to higher volatility in XAR.

Strategic Takeaways

Risk parity achieved: Despite unequal dollar exposure, both legs carry similar volatility-adjusted risk.

Scalable: You can scale this model to 2% or 3% risk per trade depending on conviction.

Dynamic: Recalculate weekly as ATR and price evolve.

I think we could enhance the strategy and see how it would help so in the next section I would enhance the ITA–XAR paired trade strategy by layering in Bollinger Bands and z-score thresholds to refine entry and exit timing.

These tools help identify mean-reversion opportunities and momentum breakouts in relative performance.

Step 1: Constructing the Spread

We define the spread as:

{Spread} = log({XAR}) - log({ITA})

This log-spread normalizes price differences and allows for statistical analysis.

Step 2: Bollinger Bands on the Spread

Using a 20-day moving average and ±2 standard deviations:

Interpretation: The spread is approaching the upper Bollinger Band, suggesting XAR may be overextended vs. ITA. If it breaches and reverts, it could signal a short XAR / long ITA opportunity. If it breaks out with volume, it may indicate momentum continuation.

Step 3: Z-Score Thresholds

Z-score measures how many standard deviations the spread is from its mean:

Z = frac{{Current Spread} - {Mean}}{{Std Dev}} = frac{0.096 - 0.080}{0.012} = 1.33

Current Z = +1.33 → Near overbought, but not extreme. A move above +2.0 would trigger a mean-reversion short on XAR vs. ITA.

Tactical Playbook

Technical Analysis - RSI Momentum

If we were to use RSI momentum on the daily period, we can see that both ITA and XAR enjoy strong positive momentum, we might be seeing a breakout if the interest from investors continue to grow and push the momentum higher.

This might signal a good time to look at these two ETFs.

Summary

Lower corporate tax rates are intended to free up capital for companies to reinvest, increase dividends, or engage in share buybacks, all of which can support stock prices.

However, the bill also carries significant fiscal implications. It is projected to add trillions to the national debt over the next decade, with critics warning of a potential "fiscal time bomb" due to increased government borrowing.

While some anticipate a "modest fiscal boost" for 2026 and earnings growth at the margin due to tax cuts and spending reforms, concerns about persistent deficits and increased Treasury issuance could put upward pressure on yields, particularly on long-term bonds.

The stock market's reaction has been somewhat mixed. While equities have seen some gains, partly due to expectations of policy clarity and trade deals, there's also been increased volatility. The ongoing imposition of tariffs and the uncertainty surrounding future trade policy continue to influence market sentiment.

Some analysts suggest that while the OBBB might provide a short-term boost, the long-term outlook is clouded by the burgeoning national debt and its potential impact on interest rates and investment. Investors are navigating a complex landscape of policy changes, economic signals, and geopolitical tensions.

Appreciate if you could share your thoughts in the comment section whether you think the bill would give the market a boost, though particular industries might felt the benefit more, I think we need to watch tariffs development for any uncertainty as well.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.