S&P 500 dips below state forecast assumptions
Fairly rare for sudden, worldwide economic shocks to be caused by decisions of one person
Trump Decisions Cause Stock Decline. Because of Donald Trump’s choices—notably his recent choices that have caused a worldwide oil shock—U.S. stock prices this morning are at levels below those assumed in the Newsom Administration’s January 9 economic forecast. The state economic forecast—presented in conjunction with the Governor’s January budget proposal—anticipated the S&P 500 to average 6609 during the first quarter of 2026. The S&P 500 closed at 6625 yesterday and has traded below 6600 most of this morning, March 19.
Stocks Still Way Up from One Year Ago. To put things in perspective, note that the S&P 500 dipped below 5000 for a time last April. It closed at 5675 one year ago today, March 19, 2025, or around 14 percentage points lower than it was at 9:16 am (California time) this morning. At 6500, the S&P 500 is at a level recorded as recently as September 2025. These stock rises still drive significant taxable gains that will benefit the California state budget in the near term. Big picture: the stock market remains “overheated,” as a November LAO report noted. In fact, Trump’s actions are likely to boost inflation and may add pressure to profits of businesses already coping with Trump’s strange, erratic tariff taxes, and all this may cause more declines in stock prices.
Short-Term Revenue Surge Continues. So, stocks remain elevated, despite recent drops, and the LAO noted recently that California income tax collections usually lag major market turns by up to a year. For now, the recent short-term surge of state revenues continues. The LAO upgraded its near-term revenue outlook significantly on February 20. Through the end of February, California General Fund revenue collections are up over $6 billion for the year to date, compared to the Newsom Administration’s January 9 forecast. And this month, through yesterday, corporate tax receipts for this month are blowing the doors off the forecast. Personal income tax collection and refund trends through April will help reveal the scale of the upward adjustment in near-term revenues in the May Revision, which the Governor must submit to the Legislature on or before Thursday, May 14. I think an upward revision of $10 billion to $30 billion remains possible across the two fiscal years, 2025-26 and 2026-27.
Future Structural Deficit Remains. I expect the May Revision will continue to show future annual structural deficits in the $20 billion range, before taking into account any budget-balancing proposals of the Legislature or the Governor. This is similar to the January 9 administration forecast. While the short-term revenue surge has boosted revenues, state spending remains elevated as a share of the state’s economy, and federal support for key domestic needs is on the decline due to decisions by those supporting Trump in Washington. This will require additional spending cuts, tax increases, or both over the next few years to return the state budget closer to structural balance. I note that, as neither LAO nor the administration assumes a significant stock market drop, the likely deficit to be corrected at some point in the next few years probably will be far bigger than $20 billion.
Deep Resilience of California’s Treasury. California enters this period of uncertainty with a surprisingly resilient state treasury, something I have noted for several years now. As of the end of February, as reported by the State Controller’s Office, General Fund cash balances on hand exceeded $16 billion, and accessible balances in reserves, the rainy day fund, special funds, and other non-pension state accounts exceeded $87 billion. The state had to borrow from external sources just to cling on to $2.5 billion or $3 billion cash balances in the depths of the Great Recession in 2009, so today’s $100+ billion state cash balances are truly remarkable. The prolonged period of state cash health reflects deep improvements in California’s budgetary management due to choices of Governors Brown and Newsom, the Legislature, and voters.
Adding to “Wall of Debt” Is An Option for the Budget in Near Term. This cash strength means the state can choose to borrow more from itself in the near term to help cope with budget issues. This could add to the $34 billion accumulated “wall of budgetary debt” in the Governor’s January budget proposal (see Figure 1 from LAO here), but the downside of more borrowing is that it generally has to be paid off eventually, adding to future projected deficits of the state General Fund. Conversely, the state could avoid added wall of debt borrowing and could try to grow cash balances by boosting reserves to prepare for an uncertain future.