Wall Street believes President Donald Trump has figured it out in his trade war, but the past week has raised concerns that investors may be wrong.
The market rejected the tariff risk under the assumption that Trump followed an earlier pattern and retreated, which was called The so-called taco trade.
This puts the stock recently into a new record-high territory, marking a stunning rebound caused by the collapse caused by his “Liberation Day” mutual tariffs in April.
But Trump grabbed those same stock market highs to justify his positive tariff rates.
He also recommends a baseline rate of 15%-20%, higher than the current 10% level.
This is because he continued to send letters to U.S. trading partners throughout the week, and if no trade agreement was reached, tariff rates would be reached on August 1. On Saturday, he threatened Interest rates in the EU and Mexico are 30%.
Although these letters are largely considered Negotiation strategystocks have shrunk from history as questions about the taco trade began to spread.
“The market seems to believe Trump will retreat again,” Capital Economics said in a report on Friday. “We’re not sure.”
For his part, Trump did not reissue reciprocity tariffs on Wednesday, when it suspended a 90-day pause. But his August 1 timeline provides only a few weeks of breathing space, avoiding the high rates contained in dozens of letters.
Meanwhile, Trump is urging specific departments to declare tariffs on copper at 50%, and warns that imported drugs could face a 200% tax rate.
Currently, stocks have not repeated the April collapse, when the S&P 500 hits a bear flirting from previous highs. The relatively static reaction was probably due to the taco trade.
“But this creates a dangerous cycle because the main reason Trump is forced to put his liberation day plan on hold is because it sells out not only in the stock market, but also in the treasury market,” Capital Economics said. “Without this pressure, Trump might feel more courageous to follow this time, especially because – at least now, at least until now – the WHO appears to have little impact on the price of final consumer goods and claims that the economy will prove to be wrong.”
JPMorgan Chase CEO Jamie Dimon also warned Investors seem complacent about the risks of Trump’s tariffs, and UBS also marked a “paradox” between the taco trade and Trump.
Bank of America economists highlighted the market’s failure to revolt against Trump’s new tariff blitz, calling it “a game that never ends.”
They added that consumer confidence is unlikely to be affected as stocks ignore the latest shocks. But it also means that the Trump administration has more incentives to upgrade because the marginal cost of doing so is very low.
“The next question is how many recalculated risk assets are willing to tolerate before the lower corrections are corrected, and how much pain Trump will tolerate before the reductions occur in April,” Bofa said. “In other words, the game between Trump and the market is subject to multiple equilibrium.”
In other words, Trump and Wall Street can continue to move around.
