Trade War Fever Has Finally Broken
The great tariff panic of 2025 is officially over.
Back in April, professional investors were convinced tariffs would bring down the global economy. Eight in ten money managers told Bank of America’s Global Fund Manager Survey that “trade war triggers global recession” was their single biggest market risk. That was the highest concentration of fear in the survey’s 15-year history. By September, that fear has all but vanished—just 12 percent still named trade war as their top worry. Inflation and monetary policy took its place.
This extraordinary reversal in investor psychology is one of the fastest shifts in sentiment on record. It reflects not only calmer headlines but also a recognition that Donald Trump’s trade strategy—executed by Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer—has reorganized global commerce without triggering the destructive retaliatory tit-for-tat trade war Wall Street once dreaded.
From Panic to Confidence
April’s survey, taken just after the Liberation Day tariffs were announced, captured the peak of the tariff scare. Managers slashed U.S. equity exposure to a record net 36 percent underweight, piled into cash, and braced for global slowdown. “Big upside needs big tariff easing,” BofA strategists wrote at the time, making tariff cuts sound like the only path back to growth.
By May, the panic had cooled slightly. The trade-war tail risk dropped to 62 percent, still dominant but off the April peak. Investors were bracing for U.S. tariffs on Chinese imports to settle around 37 percent.
June and July brought further relief. Trade-war fears slid to 47 percent in June, while July saw risk appetite return, with cash levels down to 3.9 percent—low enough to trigger BofA’s contrarian “sell” signal. (When investors become too bullish, this can be a sign of an impending downturn for stocks. When cash levels sink too low, there’s less money around to push up equities.)
By August, inflation and bond yields had joined the worry list, pushing trade-war fear down to 29 percent. And in September, the flip was complete: only 12 percent still cited trade war as the biggest tail risk, while 26 percent named a “second wave of inflation.”
Why Sentiment Flipped
The reason for the change is straightforward: the retaliation never came. Instead of escalating tariffs of their own, other countries struck deals with the United States. The tariff standoff did not become a global trade war. It became a global trade reorganization under the principles articulated by President Trump.
Trump set the strategy. Bessent and Greer carried it out in the negotiating rooms, pressing U.S. leverage until foreign counterparts made concessions. Together, they pulled off what the market thought impossible: using tariffs not to fracture trade but to restructure it.
Tariffs and the Deficit
The fiscal numbers are stunning. Tariffs are generating about $165 billion this year—roughly 0.5 percent of GDP. The effective tariff rate is expected to climb to 14 percent in 2026, raising revenues closer to 1.4 percent of GDP. Over the next decade, Bank of America economists project tariffs will reduce the primary deficit by $3.5 trillion, with another $600–$700 billion saved in interest costs. That’s roughly $4 trillion off the deficit path.
For years, investors assumed tariffs were pure economic poison. They now see that tariffs are not wrecking growth. They are funding government, reducing deficits, and shifting production homeward.
If tariffs weren’t recessionary, what about the new consensus that they’re inflationary? In September, more managers cited “second wave of inflation” as their top risk than anything else. The fear is that tariffs raise costs, stoke prices, and force the Fed to keep rates higher for longer.
But what if that’s wrong, too?
Federal Reserve Governor Stephen Miran argued precisely that. In a speech Monday to the Economic Club of New York, he said tariffs and border policy are putting downward pressure on the neutral interest rate—the rate that neither pushes the economy to grow faster nor restrains it—by boosting national saving, reducing rent inflation, and slowing population growth. Miran calculated that tariffs could lower the neutral rate by about half a percentage point and tighter border policy by another four-tenths. All told, he said the Fed’s stance is roughly 200 basis points too restrictive, posing “significant risks” to the employment mandate.
In Miran’s view, markets are once again chasing the wrong ghost—first recession, now inflation—when the real story is that tariffs and immigration policy are easing price pressures and making the Fed’s job easier, not harder.
Trump’s critics insisted tariffs would be the spark that lit a global trade war. But the trade war never arrived. What we got instead was Trump reorganizing global trade—with Bessent and Greer executing the strategy and markets finally catching up.
Investors may be making their next mistake by assuming tariffs will fuel inflation.
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