Once again, Donald Trump is talking tough about tariffs, threatening to raise them in dozens of countries, but has not yet acted. Instead, he is leaving space, or rather time, for negotiations. This time, however, the deadline is not three months, but initially three weeks, until August 1.
The markets are barely reacting. Neither the S&P 500, the Nasdaq, or the US dollar index plummeted. Investors seem convinced this is all part of Trump’s usual bluff-and-bargain routine, the now familiar “TACO trade.” It might seem that this game could go on indefinitely without causing real damage.
The uncertainty surrounding US trade policy is one of the key reasons why the Fed has been hesitant to cut rates, despite slowing inflation and pressure from Trump. Not surprisingly, according to CME Group’s FedWatch tool, there is a 93% chance that the Fed will hold rates steady at the July meeting.
Still, investors are betting on two cuts before the end of the year. Hope is driving this market more than logic.
Fear of missing out (FOMO) also helps sentiment, pushing Nvidia to a market cap of $4 trillion, for the first time in history among public companies. Bitcoin also continues to rise, surpassing the $120,000 mark. Now, all eyes are on the upcoming earnings season, which will have to pay off to keep the rally alive.
Analysts are again forecasting a slowdown in earnings growth, just as they did last quarter. But they were wrong then, as most companies beat expectations despite all the trade war noise. This pattern could easily repeat itself, which would help keep bullish sentiment in the US market alive.
Keep in mind also that the effects of trade tensions are not being felt equally across all sectors. Fundamentals seem to remain strong in sectors such as technology, communications, and the defensive sector. Tuesday’s bank earnings reports are also expected to meet, if not exceed, expectations.
The problem is that the U.S. market has been rising for months without a correction, which cannot last forever.
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