As the Donald Trump administration ratchets up import tariffs and upends trade norms, one might expect Wall Street to shudder. Instead, the American stock market has continued to climb, with the benchmark S&P 500 Index up nearly 8% so far in 2025. Investors appear optimistic that underlying economic strength and corporate performance can outlast the turmoil of the Republicans’ trade upheaval.
The higher tariffs on imports have already kicked in, raising the average US import duty to its highest in a century, while creating unrest among major trade partners such as Switzerland, Brazil, and India. The tariffs now range from 10% to 50%. Trump’s rates will now face the challenge of shrinking US trade deficits without causing massive disruptions to global supply chains or provoking higher inflation, while dealing with retaliation from trading partners.
Then arrived the latest US job growth data, which showed a trend much slower than expected in July. The data was revised sharply lower, indicating the labour market could be showing signs of stalling. Nonfarm payrolls increased by 73,000 jobs in July, after rising by a downwardly revised 14,000 in June, according to the Labour Department. This led to a furious Trump tapping an economist from a conservative think tank for the crucial role of BLS boss, with the responsibility of publishing employment figures—figures that will parrot (as per detractors) Trump’s stance on the American economy, which believes it is booming and requires “HONEST and ACCURATE NUMBERS.”
Talking about inflation, the ratio held steady in July despite import tariffs, bolstering bets that the Federal Reserve may cut interest rates in the coming days. Consumer prices rose 2.7% in the year to July, the same pace as in June, as lower energy costs offset price rises for items such as coffee, tomatoes, and tools. Analysts now see the relatively contained pace of price rises strengthening the Fed’s case for lowering borrowing costs to support the economy as job growth slows. However, an underlying inflation measure—which is seen as a better indicator of economic trends—showed prices rising at the fastest pace since February.
So, amid a volatile situation (poor job data and moderate inflation), Wall Street is holding its own. However, the question is, how long can this resilience last?
Finding The Optimism
In the opinion of Christopher Smart, managing partner of the Arbroath Group and a former economic policy advisor in the Obama Administration, “Lately, companies have been delivering good news on the earnings front. An unusually large number of firms beat their second-quarter profit forecasts, prompting analysts to nudge up estimates for the months ahead.
This wave of strong results, combined with excitement over artificial intelligence, has fuelled investor optimism. Money has poured into tech giants poised to lead an ‘AI revolution,’ helping drive the market’s price-to-earnings ratio to about 22 times forward earnings. Bulls argue that such rich valuations are justified by the promise of AI-driven future growth.”
Recent economic trends have largely vindicated investor confidence. US GDP has grown at an average of 2.8% over the past five years, thanks to a strong post-COVID rebound. The economy has kept on powering (sometimes through the sharpest interest rate increases in 40 years) as the Trump administration keeps on fundamentally redesigning the global trading order. Generous checks and rock-bottom interest rates following the pandemic may explain at least some of this remarkable performance.
Yet Trump’s economic policies send mixed signals. His major tax overhaul slashed corporate taxes and boosted defence spending, injecting stimulus but adding roughly USD 3.4 trillion to federal deficits. The White House insists these moves will turbocharge growth, but many economists warn any fiscal boost will be outweighed by the drag from tariffs. The International Monetary Fund (IMF) expects US growth to dip below 2% in the next two years, even as global growth nears 3.1%.
“Still, stocks are all about future expectations, and none of this history reveals much about the impact of the Trump Administration’s dramatic policy departures. The ‘One Big Beautiful Bill’ locked in lower corporate tax rates and delivered a massive boost to defence spending, adding some USD 3.4 trillion to the deficit over the next decade, according to the Congressional Budget Office. The administration promises, however, that together with a wave of deregulation, growth rates will be more than 1% higher over the next four years,” noted Smart.
Tariffs: A Stealth Tax On Americans
“Most independent economists expect more headwinds from tariffs than tailwinds from tax cuts and deregulation. The International Monetary Fund recently raised global growth forecasts to 3.1% this year—but doesn’t expect more than 2% in the US in 2025 or 2026,” remarked Smart.
Trump’s tariffs have effectively become a hidden tax on American businesses and consumers. The average American tariff on imports has jumped from around 2.5% before the trade war to nearly 20% with the latest duties. Not every cost will jump that much; many companies will absorb some of the increase, but consumers will still feel the pinch. The Treasury expects to collect roughly USD 300 billion in tariff duties, a bill ultimately paid through higher prices.
“Worse than this one-off blow, however, is the lingering uncertainty for investors and corporate strategists. Even as Trump’s tariffs went into effect on August 7, crucial details of the deals he has announced remain unknown,” Smart opined.
Even more unsettling is the uncertainty around Trump’s trade manoeuvres. As one round of tariffs took effect this August, with key details still unclear, Trump was already vowing new levies on products like pharmaceuticals and semiconductors. He has even wielded tariffs as leverage in unrelated disputes (including geopolitics), deepening the unpredictability.
Market Confidence Faces A Major Test
So far, Wall Street has mostly shrugged off the tariff chaos. Trump’s surprise “Liberation Day” tariff announcement in April sent stocks, bonds, and the dollar tumbling, but the panic proved short-lived. Markets quickly rebounded as investors bet the economy could weather higher costs or that the Federal Reserve would cut rates if needed.
Yet that confidence faces a test in the coming months. By autumn, American shoppers will start feeling the full impact of tariffs as higher-cost imported goods hit store shelves. This could reignite inflation just as the Fed hoped to ease monetary policy, potentially forcing a delay in rate cuts.
Meanwhile, pricier goods could erode household purchasing power and dampen spending, raising the risk of a downturn. In a worst-case scenario, a mix of rising prices and slowing growth, which is a bout of 1970s-style “stagflation,” could finally bring the stock market’s remarkable run to a halt.