The Stock Market Isn’t Testing Trump on Tariffs. It Probably Should.

Markets aren’t pushing back on Trump’s renewed focus on tariffs. (TIMOTHY A. CLARY / AFP / Getty Images)

President Donald Trump is fond of testing the most extreme aspects of his economic strategy through statements designed to provoke a reaction in financial markets. It isn’t working for his trade policy, and the consequences may not be pleasant.

Having suggested he could fire Federal Reserve Chairman Jerome Powell, he quickly retreated on Wednesday, insisting that such a move would be “highly unlikely” as the dollar tanked, stocks turned sharply lower, and yields leapt on Treasury bonds.

The pattern was similar in early April, when the president unveiled his “Liberation Day” tariffs, triggering a 12% slump in the S&P 500 over the next four trading days. His decision to pause the worst of those levies for a few months kicked-started a rally for stocks that lifted the benchmark to fresh all-time highs in early July.

Comments to reporters during the Super Bowl, in which the president hinted that some outstanding U.S. debt obligations “don’t count,” were followed by a gain of 20 basis points, or hundredths of a percentage point, in 10-year Treasury yields, before White House officials assured markets there would be no risk of a default.

“The financial markets have provided the clearest guardrails to Trump’s more extreme policy ideas this year,” said Stephen Brown, deputy chief North America economist at Capital Economics.

What is interesting now is how little heed investors are paying to his comments on trade and his renewed focus on tariffs.

The multiple letters outlining baseline trade deals with various economies around the world, as well as sector-specific levies expected over the coming months, point to pressure on the economy. They could likely deliver an effective tariff rate of 30% by 2027, according to Goldman Sachs estimates. Although the bank sees that rate ultimately landing between 18% and 22%, that would still represent the highest tariffs since at least the 1930s.

Corporate earnings forecasts, meanwhile, remain relatively downbeat. Percentage gains in collective S&P 500 profits for the second quarter and the back half of the year are expected to be in the single digits, compared with the nearly 14% recorded over the first three months of the year and the 12% gain in all of 2024.

But stocks simply haven’t responded, providing the president with the reading on his tariff policies that he might have anticipated. The S&P 500 is around 0.8% higher than where it closed on July 7, just before the White House sent a first series of tariff letters outlining duties that would take effect on Aug. 1.

The market’s benchmark volatility gauge, the Cboe Group’s VIX index, has fallen more than 21% over the past month. In late morning Thursday, it was near the lowest levels of the year.

Monica Guerra, investment strategist at Morgan Stanley, suggest that may be partly because the tariff mosaic is so complicated.

“Relative to expectations around Liberation Day, tariffs may
have a more idiosyncratic impact, depending on the country
and sector, given their piecemeal application, delayed starts
and potential deals,” she said.

“Delayed or softened macro impacts from tariffs, passage of
the tax reconciliation bill and tailwinds from deregulation and
artificial intelligence capex could be pushing markets to
look through the uncertainty.”

Investors certainly appear to be finding comfort in megacap tech stocks, particularly as they look ahead to companies’ second-quarter earnings reports, expected over the next two weeks. An index that tracks the Magnificent Seven tech stocks is up 3.7% since Trump’s tariff letters were published.

In fact, a better-than-expected slate of megacap tech results is likely to push the S&P 500 even higher. That could prompt Wall Street to raise its forecasts of how far the index will rise by the end of the year.

That kind of momentum could send a signal to Trump that the path is clear for him to pursue his summer tariff agenda. If he does so, that could create risks for growth and inflation in 2026 and beyond.

“Wall Street has finally figured out that this is how President Trump negotiates, namely by making the other side increasingly uncomfortable,” said Louis Navellier of Navellier Calculated Investing.

That seems accurate in terms of trade. But markets need to make the president uncomfortable, as well, to ensure the classic negotiation outcome of “both sides walking away disappointed.”

At present, everyone seems pleased. That might not last.

Write to Martin Baccardax at martin.baccardax@barrons.com