The impending tariffs proposed by President Trump, set to begin on August 1, have many worried, from corporate giants to everyday Americans. The potential economic downturn is a point of concern for many. Yet, an unexpected trend contradicts this narrative of concern: the stock market continues to boom. Companies of significant scale in the US, represented by the S&P 500, alongside the tech-heavy Nasdaq, have consistently been breaking new records.
This divergence raises an important question: Why is this happening amidst such economic turmoil? Some key points should be taken into account in this regard, considering why the ingrained worry still exists within the market. The well-known phrase ‘It’s the economy, stupid’, popular since President Bill Clinton’s campaign in 1992, suits the current scenario and explains why in times of economic stress, investors are leaning toward the skyrocketing stock market rather than retreating.
Concerns over tariff impacts notwithstanding, the overall economic health appears to be stronger than initial expectations. There’s been a mild increase in inflation in June this year, growing to 2.7% compared to the same month the previous year. However, consumer cost increases, which were expected to cause significant economic instability, have not yet arrived.
The current labor environment is also showing positive signs. Continuous hiring by organizations alongside a relatively low rate of workforce displacement illustrates a healthy employment rate at a historic low of 4.1%. These positive economic signals are not going unnoticed by investors, despite economists’ projections of a decrease in the U.S. economic growth rate over the latter half of the year.
A sizeable 33% chance of a recession occurring within the next twelve months is projected due to this expected slowdown. The minimal slowdown has not dampened Wall Street enthusiasm, with corporate earnings showing up as healthier than market predictions suggested they would be. Major enterprises like Google’s parent Alphabet, Netflix, AT&T, and Hasbro have surpassed market projections, leaving investors with a sense of gratification rather than alarm.
These businesses are expressing optimism about their future state in the context of tariff ambiguity. Delta Air Lines, for instance, has reported an upswing in traveler confidence. This signifies an intriguing disparity in the U.S. economic landscape, where personal anxieties about the future remain high, but consumer spending follows an upward trend, which is boosting the financial health of corporations.
There are, however, some sectors grappling with the tariff implementation more intensely. Auto manufacturers, notably General Motors, have reportedly recorded a significant $1.1 billion loss in profit stemming from increased tariffs. They have explicitly voiced their tariff-related worries, particularly given that these tariffs will likely have a more pronounced impact on smaller businesses in comparison to their larger counterparts.
Trump’s tariff announcement in April affected virtually all countries and took the stock market by surprise with the elevated import taxes. However, following this downturn, the market bounced back after President Trump announced a 90-day reprieve, which was extended up to the coming Friday. Throughout this period, the president kept a standard 10% tariff on virtually all U.S. imports while maintaining other tariffs on specific goods such as steel and aluminum.
The delay in executing additional overarching tariffs has given rise to what the market labels the ‘TACO trade,’ an acronym for ‘Trump Always Chickens Out,’ coined by a Financial Times columnist. Despite Trump’s disapproval of this term, it signifies an investor belief that Trump’s announced measures may not be as harsh as initially suggested.
On the brighter side, Trump recently announced a trade agreement with Japan, with the U.S. imposing a 15% tariff on imports from Japan, the second-largest Asian economy. At any other time, this rate would have likely sent shockwaves down the investor community. But in the era of Trump, where he has successfully redefined investor expectations, this tech-savvy change has instead provided a sense of relief.
Indeed, it has done more than just that, it also pushed the S&P 500 to another record high. By declaring high tariffs initially and subsequently settling at significantly reduced rates during trade deals, Trump has re-engineered investor response to tariffs. If kept at this lower level, analysts believe the global economy may be better equipped to endure the tariffs.
However, there remains an underlying thread of unease amidst these record-breaking highs in the stock market. Market experts harbor fears that the investors might have misjudged the tariff situation. In spite of Trump reaching a few trade agreements, significant trades are still in a state of flux, especially with the largest trading partners for the United States — Mexico, Canada, China, and the European Union.
The lingering economic impact of the tariffs is a real concern. Although the implemented duties haven’t been as severe as initially feared, the average tariff rate remains the highest it’s been since the 1930s. As import costs rise, so will the prices consumers pay, inevitably influencing both economic growth and inflation, and the effects may not be clearly seen right now.
And there is more than just tariffs to consider. President Trump’s recurrent attacks on Federal Reserve Chair Jerome Powell create further uncertainty. Despite indications that he will not fire Powell — a move that could instigate a fierce legal battle and induce market instability — Trump’s criticisms persist. Moreover, with stocks highly priced, any unforeseen event could cause a substantial market crash. Sandy Villere of Villere & Co. warns of potential market falls anywhere from 10% to 12% in the latter half of the year. This shifts the focus to the apparent perfection of the stock market and the higher it rises, the more likely it may result in a disastrous fall.
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