Wall Street might be misinterpreting recent developments in tariff policy. Equity markets experienced a sell-off on Monday, with the Dow Jones Industrial Average declining by over 400 points following President Trump’s announcement of important new tariffs on imports from South Korea and japan. This action later expanded to encompass 14 nations, and the deadline for “reciprocal” tariffs was extended to August 1st from its previous date of July. Despite the potential for increased inflation, reduced consumer spending, and diminished corporate profits associated with these higher duties, the market’s reaction was surprisingly restrained, suggesting a widespread belief that the most damaging phase of the tariff conflict is over. Though, some analysts are voicing concerns that this assumption could prove incorrect.
Andy Laperriere, head of U.S. policy research at Piper Sandler, noted in a recent report, “We’ve consistently observed that President Trump demonstrates a remarkable degree of openness and fulfills a greater proportion of his campaign promises compared to most presidents. We’ve advised investors to take his statements on trade seriously and believe what he says.” He cautioned, however, against placing undue faith in the pronouncements of the governance’s economic advisors, arguing that they have been presenting an overly optimistic narrative to investors for the past three months, one that diverges substantially from reality.
Laperriere asserts, “The reality is that President Trump favors high tariffs, has implemented them, and intends to increase them further.” The muted response to the announcement of a 25% tariff on Japan and South Korea underscores the market’s apparent dismissal of the tariff issue. “Investors may be finished with tariffs, but we doubt Trump’s tariff agenda is finished with investors.”
The stock market’s extraordinary recovery from its April lows was fueled, in part, by White House messaging that portrayed tariffs as primarily a negotiating tactic, with the expectation that the highest levies would be rolled back as negotiations progressed. However, the newly announced tariffs mirror, and in some instances exceed, the rates initially threatened in early April, indicating President Trump’s reluctance to concede ground.For example, Japan now faces a 25% tariff, slightly higher than the 24% initially proposed, and Malaysia is subject to a 25% tariff, also exceeding the earlier 24% threat.
Laperriere explains that the President seeks “deals” that largely preserve his existing tariffs, and nations unwilling to accept these high U.S.tariffs and offer concessions will face reciprocal duties. While the market interpreted the deadline extension as a sign of leniency, it may rather signal a firm stance.
These developments suggest an effective tariff rate higher than the market’s current consensus estimate of 10%. UBS economists estimate the current weighted average tariff rate is around 16%, potentially rising to approximately 21% if the April 2nd rates are reinstated. Ed Mills, a Washington policy analyst at Raymond James, points to recent agreements with the United Kingdom and Vietnam as evidence that a baseline tariff rate below 10% is unlikely.
Furthermore,Stephanie Roth of Wolfe Research highlights growing inflation concerns. “Investors appear to be downplaying the potential for rising inflation. Ultimately, the cost of these tariffs will be borne by someone-either through higher consumer prices (CPI), reduced corporate profit margins, or, most likely, a combination of both.” While she anticipates the economy will remain resilient, she believes these developments pose near-term risks to the equity rally and reinforce the expectation that the Federal Reserve will maintain its current monetary policy throughout the year, given the looming inflationary pressures.As of June 2024, the Consumer Price Index (CPI) rose 3.3% year-over-year,demonstrating ongoing inflationary pressures that could be exacerbated by these new tariffs.