The Calm Before the Tariff Storm - Why Markets Are Ignoring Trump's Latest Trade Threats

Markets hardly batted an eye at new tariff threats this week.

The S&P 500 reached fresh highs as Trump imposed 25% tariffs on South Korea and Japan. Why is the market so serene when tariffs made headlines once again?

The answer lies in what's yet to unfold.

The Nasdaq performed best among major indexes, with tech extending its AI-fuelled rally.

Nvidia surpassed the $4 trillion market capitalization for the first time. The Mag 7 are predicted to report 14.8% growth in Q2, compared to a mere 1.9% for the other S&P 500 firms.

Trump's tariff announcements this time included more than 20 countries. The rates range from 15%-50%, with Brazil receiving the worst treatment at 50% because of legal actions against ex-President Bolsonaro.

Canada is slapped with 35% tariffs, an increase from 25%.

But here's what’s important to note: Vietnam already negotiated a deal that brought down its tariff from 46% to 20%.

The U.K. has already negotiated as low as 10%. Initial indications are that these rates are more negotiating stances than final outcomes.

The Fed minutes showed profound disagreement among policymakers.

Though most predict rate cuts this year, two members are looking for cuts as soon as late July. Others don't see any cuts in 2025.

This explains why Treasury yields can't find any sustained direction.

Trump's One Big Beautiful Bill was passed on the 4th of July, continuing the 2017 Tax Cuts and Jobs Act.

The legislation cuts taxes by $4.5 trillion over 10 years, but only reduces spending by $1.2 trillion. Net result: $3.3 trillion added to the deficit.

The subdued market response masks what lies ahead.

Tariffs have increased from 3% effective rate in Q1 to 15% in Q2, heading towards the mid-to-upper teens. The complete effect has not yet been felt because companies built up inventory in advance of implementation.

We foresee PCE inflation increasing to 3.5% at the end of the year as firms pass on increased costs.

But it is supposed to be a one-time blip, not ongoing inflation. The crucial parameter is how much foreign producers absorb rather than pass through.

Earnings season kicks off Tuesday with the major banks.

Q1 witnessed 13% growth in earnings in spite of tariffs. However, with tariff rates now entering the mid-teens, we anticipate effects to at last manifest in Q2 outcomes.

Expectations have also been lowered over the last 12 weeks. Q2 earnings estimates have been cut 4%, reducing expected growth to only 5% - the weakest since Q2 2023.

Just 6 of 11 sectors anticipate positive earnings growth this quarter.

The rally in the market has set a tall hurdle for earnings to overcome.

The S&P 500 rallied 25% in the last 12 weeks, sending valuations into the 93rd percentile historically. Tariff risks are now resurfacing, so earnings have to do the heavy lifting.

We're witnessing greater dispersion within the Magnificent Seven as AI buildout gains accrue to fewer firms.

Some lead infrastructure development, others drive AI adoption. This creates alpha opportunities for those with insight into potential winners.

Our stance: remain overweight U.S. equities in spite of near-term volatility risk.

We continue to prefer large-cap and mid-cap shares. The underlying foundation continues to be in place, and pullbacks must be utilized to invest at more attractive prices.

The three-month tariff reprieve concludes August 1st, yet the subdued market response indicates unyielding economic principles restrict the speed at which the world can evolve.

We anticipate that growth will decelerate in Q4 when the complete tariff effect is felt, but Fed rate reductions should maintain the expansion.

Markets are quiet because the actual tariff effect has yet to come.

Businesses stockpiled inventory and absorbed costs so far. When that buffer runs out, we'll see the true economic effects.