Markets have spent months assuming Trump would never go through with his tariff threats. That’s the trade: “Trump Always Chickens Out.” But when that bet becomes the rally’s only pillar, it starts to look less like a strategy and more like a liability.
Doesn’t it?
The second Trump presidency hasn’t even settled in fully, yet the S&P 500 has already notched fresh record highs. The Nasdaq, riding another AI-fuelled wave, is in uncharted territory. European markets, despite being squarely in the crosshairs of the new tariff regime, have so far dipped only modestly. Canadian equities are touching peaks. And Mexican markets are barely bruised. All this even as the US president threatens to slap 30pc tariffs on EU and Mexican imports, 50pc on Brazilian goods, and 35pc on Canadian products not covered under USMCA.
That’s quite a disconnect. A market that shrugs off the potential for retaliatory tariffs, disrupted supply chains, and impaired corporate margins isn’t just complacent; it’s inviting mispricing. And in doing so, it risks triggering the very outcome it’s discounting.
For now, investors appear convinced that Trump is simply posturing to extract concessions. They point to April’s Liberation Day tariffs – harsh in tone but ultimately watered down – as evidence that headline risks will fade just like they did the first time. But the danger is that this resilience, which Wall Street likes to see as strength, could instead embolden Tariff Trump. If equity markets refuse to flinch, why wouldn’t the administration escalate?
That’s the so-called doom loop that the international financial press has only just started wondering about. Markets bet on moderation. The administration sees no market pushback and leans harder into protectionism. Retaliation follows. Growth forecasts fall. Asset prices catch up to reality. And just like that, a rally built on faith, not fundamentals, loses its anchor.
Already, cracks are beginning to show. Brazilian equities are down 5pc in recent days. European and Mexican indexes have softened. But US stocks remain euphoric. The S&P’s recovery from its April low was the second-fastest in 75 years. And forward earnings multiples are now well above long-term averages. The AI boom may justify some of this optimism. But not all of it. Not in the face of a global trade reconfiguration.
The US trade deficit with the European Union alone was $235.9 billion last year, second only to China. But the bilateral trade volume was larger – $975 billion with the EU versus $582 billion with China. Yet market participants still seem more worried about China than Europe.
That’s a miscalculation.
Trump’s rhetoric about Europe “ripping off” America has been consistent. The EU is not a sideshow – it’s the main event. And if Washington makes good on its 30pc tariff threat, there is little doubt Brussels will respond. In that case, the April rally will not hold.
Most analysts featured on Bloomberg, Reuters, etc, remain overweight US equities, for now. But even they concede that uncertainty around who ultimately bears the tariff costs – corporates, consumers, or governments – could lead to sharp dispersion in returns.
That’s another way of saying the index-level calm could be masking sector-level chaos.
And it’s not just about tariffs anymore. There’s a broader budgetary calculus at play. Trump’s new spending proposals, especially in defence and infrastructure, have widened the fiscal gap. Tariffs offer a convenient revenue patch; politically defensible and populist in tone. But they’re also economically disruptive and globally destabilising.
If markets continue to reward this behaviour, expecting it to be dialled down at the eleventh hour, they may soon find themselves with fewer places to hide. Volatility will return. Pricing models will adjust. And the TACO trade – already on borrowed time – will face its reckoning.
This isn’t to say protectionism is guaranteed. Trump, like any politician, has limits. Barclays analysts still believe his tolerance for financial market stress is “limited.” But that’s not a reliable brake. It’s reactive, not proactive. By the time the stress shows up, the damage may already be done.
The real risk here is behavioural.
Markets are conditioning the administration into thinking they can absorb shock. That’s dangerous. Because it means when the shock finally lands, it will do so without a cushion.
So far, the market’s optimism has come cheap. But if Europe retaliates in kind, and tariff averages climb well above the 10-15pc threshold markets are quietly baking in, growth assumptions will need to be slashed. And with them, forward earnings, risk appetite, and portfolio allocations.
In short, this isn’t 2018 redux. The economic landscape is more fragile, the geopolitical stakes higher, and investor positioning more crowded. This time, if Trump doesn’t chicken out, Wall Street might.
Copyright Business Recorder, 2025
The writer can be reached at [email protected]
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