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US stocks’ record highs obscure the risks Donald Trump poses to the world’s biggest economy, according to big investors and senior bankers who have warned over growing “complacency” in the markets.
Senior executives from Amundi to JPMorgan Chase said buoyant markets were pricing in too much confidence that the US president will back down from policies most likely to threaten the country’s financial stability.
“It is for me pretty clear that there is some complacency around the Taco trade,” said Vincent Mortier, chief investment officer of Amundi — Europe’s biggest asset manager — referring to a narrative espoused on Wall Street that ‘Trump always chickens out’.
JPMorgan chief executive Jamie Dimon, one of the most prominent executives in US finance, echoed that sentiment at an event on Thursday, noting that, “unfortunately, I think there is complacency in the market”.
“The market is assuming that a lot of this tariff policy will go away, and I don’t think it will,” said a former top Trump official. “Trump has always liked tariffs.”
The S&P 500 share index has surged about 30 per cent from an April low, rebounding since Trump paused the sweeping tariffs he announced during his “liberation day” event at the start of that month. Equities have broadly shrugged off his latest batch of tariff threats this week against large global economies including Japan, South Korea, Canada and Brazil.
Trump has insisted he will carry through with his threat to impose steep “reciprocal” levies beginning on August 1, pledging there would be no “extension” if counterparts do not reach trade deals. Only three countries have done so — the UK, China and Vietnam.
Many Wall Street banks’ research departments have told clients Trump will probably water down his most severe levies rather than risking another bout of market turbulence.
This sanguine view has helped keep measures of expected volatility in US stock and bond markets subdued, and pushed down the cost of borrowing for US companies.
Goldman Sachs on Friday noted “credibility questions can help explain the more muted reaction” in US equities to Trump’s barrage of tariff announcements this week compared to the tumult in early April. The S&P 500 closed at a record high on Thursday and was little changed on Friday.
But some bankers and investors are growing increasingly anxious that the president could surprise markets by sticking to his guns.
Robert Tipp, head of global bonds at PGIM, said: “It is a surprising environment in the sense that the Taco sentiment could be going by the wayside. The tariffs that have ended up sticking are somewhat high. And yet markets have cruised on. Will there be a day of reckoning?”
Market participants said it was not tariffs alone that risked a fresh bout of market upheaval.
Trump has repeatedly pressed Federal Reserve chair Jay Powell to lower interest rates in an attack on the central bank’s independence. Meanwhile, Congress has passed the president’s flagship budget bill, which is forecast by independent analysts to add trillions of dollars in public debt in coming years.
These concerns have bled into the foreign exchange market, with the US dollar suffering its worst first half of the year since 1973. Some bankers and investors are worried deeper strains may lie ahead.
Amundi is underweight the dollar within “most of our portfolios”, Mortier said, predicting that the greenback would depreciate against other currencies.
A senior executive at a major US bank said the Trump administration’s policies and tax bill have “dented America’s perception as a stable, reliable store of value”.
The executive said investors are thinking about their US exposure like never before and many have acknowledged privately that “the risk-free premium” of the US market has slipped.
However, he stressed the biggest concern was the ballooning US deficit: “It’s the largest peacetime shortfall since [the second world war]. The math is simple — spend a bit less, tax a bit more — but punting it hurts the bond market and eventually the dollar,” he said.
A senior executive at a global lender agreed the US had lost its “safe haven” status. “The US is still an important market but the cost of doing business has gone up considerably,” the executive said.
The executive added there is also a rising sense of angst over broader political issues, such as the rule of law.
“The recent attack on law firms, the media, universities is concerning for global investors who always believed this kind of stuff happened in emerging markets rather than in the world’s largest and most stable economy,” the banker said.
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