As President Donald Trump threatens to impose massive tariffs on imports starting August 1, concerns about the potential impact on the U.S. economy loom large among businesses and consumers alike.
Despite these worries, a surprising trend has emerged in the financial markets: stocks are soaring.
Both the S&P 500 and the tech-heavy Nasdaq have recently reached record highs, raising questions about the market’s optimism in the face of tariff threats.
Here are four key factors explaining this paradox and highlighting ongoing investor concerns regarding the economic outlook.
**1. The Resilient Economy**
The phrase “It’s the economy, stupid”—made famous during Bill Clinton’s presidential campaign in 1992—accurately mirrors the current sentiment driving investors’ confidence.
Despite the looming tariff situation, the U.S. economy appears surprisingly robust.
Inflation rose to 2.7% in June compared to the previous year, but this has not resulted in the significant spike in consumer prices that some economists predicted.
Additionally, the labor market remains strong, with employers hiring consistently and unemployment at a historically low rate of 4.1%.
Investors are taking note of these positive economic indicators.
Brad Peterson, national portfolio adviser at Northern Trust, stated, “The economy has proven to be more resilient than many feared in the face of tariff threats.”
Yet, while the economy shows strength, many economists still foresee slower growth in the latter half of this year, predicting a 33% chance of a recession within the next year, according to the latest quarterly survey from The Wall Street Journal.
**2. Corporate Earnings Defy Expectations**
A second factor contributing to stock market gains is the unexpectedly strong performance of corporate earnings.
The earnings reports from several high-profile companies, including Alphabet (Google’s parent company), Netflix, AT&T, and Hasbro, surpassed Wall Street forecasts, easing concerns among investors.
Moreover, the outlook expressed by these companies remains optimistic; for instance, Delta Air Lines recently noted that travelers are gaining confidence despite tariff-related uncertainties.
This scenario reflects a unique disconnection within the U.S. economy: while Americans may harbor anxieties about their future, their consumer behavior suggests otherwise, as spending continues unabated.
Amanda Agati, chief investment officer for PNC Asset Management Group, remarked, “We may feel bad. We may feel concerned, but the hard data would suggest our behavior is something else entirely.”
However, not all sectors are thriving equally.
General Motors announced a $1.1 billion hit to profits due to tariff implications, although the company remains profitable overall.
Small businesses, in particular, may struggle more significantly under the burden of tariffs, facing greater challenges than larger corporations, which often have more resources to adapt.
Kevin Gordon, a senior investment strategist at the Schwab Center for Financial Research, stated, “When you think about small businesses in the country, they struggle a lot more from higher tariffs because they just don’t have the kind of flexibility or the cash balances that large companies do to be able to combat it.”
**3. Trump’s Art of Negotiation**
An additional layer to this complex economic dynamic is how President Trump has managed tariff announcements.
Initially, when he unveiled his tariff agenda in April, stock markets experienced a significant decline in reaction to the high rates proposed.
However, after Trump announced a 90-day pause—a delay that has since been extended—investors regained their confidence.
Despite maintaining a baseline 10% tariff on most imports, Trump’s more recent trade negotiations have led the market to adopt a perspective referred to as the “TACO trade,” or “Trump Always Chickens Out,” a term popularized by a Financial Times columnist.
This suggests a belief among investors that the president’s actions may ultimately be less severe than initially indicated.
For example, Trump’s recent announcement about a trade deal with Japan, involving a 15% tariff on imports from the country, was met with relief from investors, as it was lower than the expected 25%.
Thus, the S&P 500 reached new heights, signaling that investor sentiment has shifted positively.
Currently, a new economic reality appears to have formed, wherein lower tariff rates are becoming accepted.
Trinh Nguyen, a senior economist for emerging Asia at Natixis, noted that “10% is the new zero,” implying that tariffs previously perceived as significant now seem less daunting against the backdrop of prior expectations.
**4. Lingering Concerns About Future Impacts**
Despite the record highs in stock markets, a sense of unease persists among certain analysts regarding the potential for miscalculating the effects of the tariff situation.
While several trade deals have been enacted, the most crucial agreements with major U.S. trading partners—such as Mexico, Canada, China, and the European Union—remain unresolved.
Additionally, while the current situation may not seem catastrophic, the average tariff rate in the U.S. is at its highest level since the 1930s, which is expected to elevate import costs and consumer prices over time.
This could ultimately have adverse effects on economic growth and inflation, even if the immediate outcomes are not fully reflected in current data.
Other uncertainties loom on the horizon, particularly President Trump’s continued public criticism of Federal Reserve Chair Jerome Powell.
Although Trump has indicated that he will not seek to remove Powell—an action that could lead to market instability—his persistent attacks raise questions about future Federal Reserve policy and market response.
Furthermore, stocks are currently priced at high levels, making them vulnerable to significant corrections should unexpected events occur.
Sandy Villere, a partner and portfolio manager at Villere & Co. in New Orleans, expressed caution, suggesting that markets could potentially experience a 10% to 12% drop in the latter half of the year.
“Everybody’s assuming everything’s going to be perfect,” he explained. “That’s usually where you get the pullback. When things are priced for perfection, we get nervous.”
As the current economic landscape evolves, the overarching concern remains clear: stock markets are now priced for perfection, and the more they rise, the greater the risk of an eventual downturn.
image source from：npr
