Markets cheer as Trump’s rising tariffs prove less severe than investors feared

(Originally published July 29 in “What in the World“) Trump reached a deal with the European Union that raises tariffs on imports from the group to 15% from their current 10%.

Markets were predictably relieved, however, that the deal averts Trump’s threat to slap European imports with a 30% tariff, a move that would likely have sparked a trade war. Some European steel, for example, will be imported under the 15% tariff and not Trump’s 50% tariff on imported steel. European cars, in addition, appear likely to enjoy a 15% tariff instead of Trump’s 25% tariff on imported cars. And the 15% tariff on imported European pharmaceuticals is a huge discount to the 200% tariff Trump is still threatening to impose on imported drugs.

Yet with both the benchmark S&P500 and the Nasdaq scoring new record highs almost daily, some investors are worried stocks have defied gravity—and darkening economic signals—for too long. Trump’s 15% tariff may be lower than some feared, but it’s still higher than tariffs were before he took office, and higher than the 10% blanket tariff he imposed in April. The implied yield on earnings from companies whose stocks make up the benchmark S&P500 index has fallen nearly level with the 4.4% yield on ostensibly less risky, 10-year U.S. Treasury bonds. That’s usually seen as a sign that stocks are too expensive.

Source: The Wall Street Journal

The market is NOT the economy, of course, but it is a forward-looking gauge of corporate profit expectations. And with the economy likely to have grown only about 1% in the first half of this year, and tariffs still looming, corporate profitability doesn’t look that promising. Some aspects of the market’s rally appear to be a default response to lower spending/higher savings and fears of stagflation, with cash-rich investors pouring money into stocks rather than risk it on starting or expanding businesses and the rest just joining in as prices spiral upward. Another theory is that the rally is being driven by hopes AI will boost profitability in the same way personal computing did in the 1990s. Will AI disappoint? Time will tell.

Trump’s “retaliatory” tariffs, meanwhile, are still set to go into effect Friday against U.S. imports from dozens of other countries that have yet to reach trade agreements with Washington by the president’s Aug. 1 deadline. That includes Canada, India, Mexico, South Korea, which collectively account for roughly a third of all U.S. imports. China is also scrambling to clinch a deal before the Aug. 12 deadline on its ceasefire with Trump runs out.