By Martin Baccardax
Stocks have clawed their way to another record high this week as investors continued to extend increasingly precarious bets on trade.
Traders and investors have ridden an extraordinary spring rally by betting against President Donald Trump's myriad tariff threats, a play known as the TACO trade, for "Trump Always Chickens Out." The pace of those gains is slowing, and the risk associated with hoping that the president will soften or reverse his increasingly complex tariff gambits is mounting.
The S&P 500, while notching another record high Thursday night, is just a single point ahead of where it was before the July 4 holiday. And there are troubling signs under the hood in both equities and fixed income.
Megacap tech stocks, which have long carried U.S. indexes to outsize gains, are still dominating performance. Adam Turnquist, chief technical strategist at LPL Financial, says five stocks -- Nvidia, Meta Platforms, Broadcom, Amazon.com, and Microsoft -- are responsible for half of the S&P 500's 5.2% gain over the past month.
That narrow market breadth heading into a second-quarter earnings season that is likely to be defined by tariff and inflation risks could be concerning. Analysts expect S&P 500 profit growth to slow sharply from the first quarter, with collective earnings rising just 5.8% from a year earlier, compared with 13.7% over the first three months of the year.
"The market narrative has pivoted back to tariffs, which remain a moving target," said Daniel Skelly, head of Morgan Stanley's Wealth Management and Market Research team. "While there will likely be no shortage of announcements coming out of the White House in the coming weeks, it's unlikely the new August 1 deadline will be the end of the tariff story."
Signals from the bond market, while subtle, are also suggesting growth and inflation risks. While short-term yields are largely steady, longer- term yields are rising faster in a pattern known as a "bear steepening" that is often seen as a sign of building inflation pressure.
A pickup in inflation could prevent the Federal Reserve from lowering interest rates, as investors are counting on it doing. This is an especially acute risk following a stronger-than-expected June jobs report last week and muted weekly unemployment claims on Thursday.
Higher rates can hurt stock valuations, too. As rates rise, the present value of future earnings, which is essentially what an investor pays for a stock, declines.
Investors will get at least some clarity on the risks next week, when the Bureau of Labor Statistics will publish consumer price index inflation data for June and JPMorgan Chase will kick off the second-quarter earnings season. Both will arrive before the market opens on Tuesday.
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said the tariff boost to consumer prices in the June data will be "undeniable."
"Evidence suggests that many retailers are hiking prices to claw back tariff costs, while services prices probably gathered momentum too after a soft patch," he said.
Meanwhile, tariff-related headlines are only growing more ominous. The president appeared to cross a political threshold earlier this week by threatening a 50% levy on goods from Brazil, even though the U.S. has a trade surplus with the country, on the basis of its legal pursuit of former President Jair Bolsonaro.
The 35% tariff threatened on Canada Thursday night came despite an existing trade agreement, which the president himself negotiated in his first term. Reports suggest last week's trade agreement with Vietnam was more of a unilateral decree than a negotiated deal.
Concrete signs of progress in talks between the U.S. and China remain elusive, regardless of the trade truce between Washington and Beijing. The next round of negotiations is slated for early August.
Duties are now expected on copper imports, alongside steel and aluminum. They will likely soon affect the pharmaceutical and semiconductor sectors as well.
The president's tariff strategy, meanwhile, is now woven deeply into the U.S. economy, making it difficult to back away.
Revenue from tariffs is rising as the fastest pace since the 1930s, and the impact on the average American household, in the form of price increases and slower economic growth, is around $2300, according to the Yale Budget Lab.
All that has put the president at the forefront of discussions with world leaders, placed him at the epicenter of the news cycle, and compelled business executives of all stripes to pay visit to the White House.
Betting on this strategy to fade away quietly seems imprudent at best. At worst, it is a dangerous risk to take heading into the back half of the year.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 11, 2025 09:02 ET (13:02 GMT)
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