At least for now, the U.S. stock market is on board with President Donald Trump’s increasingly aggressive use of executive power when it comes to tariffs.
On Tuesday, major stock indexes hit fresh all-time highs as investors digested an inflation report that was mostly tamer than feared. While the details of the report suggest an overall mixed picture for the economy, it suggested fears of large immediate price increases from Trump’s tariffs may no longer be warranted.
“Many prices will end up rising in time due to tariffs, but we don’t see inflation pressures persisting,” James Knightley, chief international economist at ING, said in a note to clients. “We are in a very different situation to 2021/22 when inflation soared to 9%.”
While the rate of inflation for some goods exposed to tariffs picked up in July, it was weaker for others, like appliances and apparel. Last month’s heavier price increases were instead mainly found in service sectors like airfare and auto insurance rates.
“The strength was concentrated to a few specific components and not broad based,” analysts with Citi said in a note.
Tariffs are costs added to imports in the form of taxes. Goldman Sachs analysts have estimated that consumers have been responsible for as much as 22% of the cost increases, with the percentage set to climb as the tariffs work their way more fully into supply chains — though Trump attacked Goldman’s estimates Tuesday. Efforts by firms to stockpile goods ahead of the tariffs’ impacts, as well as summer discounts and ongoing tariff deadline extensions by Trump, have insulated consumers from further effects.
Tariffs continue to get negative reaction in surveys, with a mid-July Fox News poll showing Americans disapproved of Trump on tariffs by a 26-point margin. That was virtually unchanged from April, when Trump revealed shock new tariff levels in his Rose Garden “Liberation Day” speech announcing soaring new import duty levels.
Stocks, meanwhile, continue to shrug them off. After Tuesday’s inflation report, traders increased the odds of a rate cut by the Federal Reserve at its next meeting in September. When markets expect the Federal Reserve to loosen financial conditions and make it easier for businesses to borrow money, stocks tend to rise because firms will have to pay less money in interest.
Stocks’ recent behavior is in stark contrast to their dramatic spring sell-off in the wake of April’s “Liberation Day” speech. Investor reaction was so intense that Trump instituted a 90-day pause to reconsider what was set to be a cornerstone of his second administration’s economic policy.
Today, Trump’s focus on tariffs hasn’t abated — but he has dialed back the more maximalist tariff levels he initially outlined. Combined with signs of a shakier labor market, investors are more convinced that the Fed will err on the side of supporting the economy by lowering interest rates to support overall business activity.
The performance of the stock market itself isn’t a full picture of the broader economy, however. Instead, the gains of the S&P 500 and the Nasdaq increasingly reflect the outsized returns of a handful of tech companies that investors believe will reap massive gains from their investments in artificial intelligence technology.
The so-called Magnificent Seven tech stocks — Alphabet (Google’s parent), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — now account for one-third of the weighted average of the S&P 500, the broadest index of stocks Reuters reported last month, citing data from LSEG Datastream consultancy.
According to analysis from Morgan Stanley, at the end of July, just 9% of companies that make up the S&P 500 were at 52-week highs.
The index’s movements are thus now heavily correlated with changes to the outlook of a handful of companies. If just one of them underperforms, it can take the entire market down with it.
“When a handful of stocks dominate the market … if you do have a period of disappointment from those stocks, you could see disproportionate impacts on your portfolio from just a handful of company-specific issues,” Michael Reynolds, vice president of investment strategy at Glenmede financial group, told Reuters.
Small businesses remain especially vulnerable to the impact of tariffs, since they have less pricing power than larger firms. The National Federation of Independent Businesses, the country’s largest small-business trade group, reported Tuesday that a shrinking share of respondents say they are profitable.
“Increased costs are affecting everyone. I believe things will improve, but it will take time — six to 12 months. I just hope small businesses can hold on that long,” the NFIB quoted an unnamed fabricated metal product manufacturing firm in Michigan as saying in a July report.
The U.S. economy isn’t out of the woods yet, said Kevin Gordon, director and senior investment strategist at Charles Schwab financial group. Wednesday, the Bureau of Labor Statistics will report a separate measure of inflation that tracks wholesale inflation, or what producers get for their products and which tends to be more closely watched by the Federal Reserve. If it shows more pronounced signs of inflation than what Tuesday’s report suggested, stocks could quickly come down from their new highs.
Barring that, conditions remain more benign than feared, he said, potentially setting the stage for further stock gains.
“Weaker growth is not a concern at the moment,” he said. “Yes, there’s been some pullback, but it doesn’t mean we’re in any kind of recessionary scenario.”
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