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Investors fear that Donald Trump’s tolerance for a steep stock sell-off is far higher than it was in his first term as they lose faith that financial markets will restrain the US president’s tariffs and spending cuts.
US stocks have slumped in recent days, with the S&P 500 sinking more than 8 per cent from a record high hit less than three weeks ago, as Trump’s tariffs have triggered concerns over the trajectory of the world’s largest economy.
Many investors and Wall Street banks had bet Trump would ultimately back off his most severe tariff threats and cuts to the federal government if markets respond violently, but hopes for a so-called Trump put have dimmed as markets shudder.
“Markets are questioning the notion that the Trump administration would adapt policies in response to equity market volatility or economic growth concerns,” UBS’s chief investment office told clients on Monday evening.
Alex Kosoglyadov, head of global equity derivatives at Nomura, said that in late February “people were wondering whether [Trump] was going to take his foot off the gas pedal on tariffs and some of the federal spending cuts that were spooking markets”.
“In the last couple of trading days, sentiment turned in the sense that there were very clear signs that the Trump ‘put’ either didn’t exist or was set lower than where people thought it was,” he said.
The rising sense of gloom has not been limited to the stock market: Goldman Sachs and Morgan Stanley have trimmed their expectations for US economic growth on worries about tariffs, and retaliation from trading partners. Delta Air Lines on Monday evening also warned that economic “uncertainty” had hit its business, prompting the carrier to sharply reduce its outlook for sales and earnings in the first quarter.
The Vix index, a measure of expected volatility in US stocks, has soared from 12 to 28, above its long-term average of 25. The tech-focused Nasdaq Composite, which has surged in the previous two years, is down more than 13 per cent from its mid-December record high.
During Trump’s first term, financial market turmoil was widely seen as a crucial guardrail in forcing him to reverse course on policies that were seen by investors as harmful, at least in the short term, to US economic growth.
“Everyone thought the only way he backs off is if the stock market plummets,” said one trading executive at a Wall Street bank. “What people didn’t see was he’d change his narrative if the stock market plummets.”
The White House doubled down on its dismissal of the financial market tumult following Monday’s steep equities sell-off.
“We’re seeing a strong divergence between animal spirits of the stock market and what we’re actually seeing unfold from businesses and business leaders, and the latter is obviously more meaningful than the former on what’s in store for the economy in the medium to long term,” a White House official said.
As US stocks have fallen sharply in response to the threat of tariffs against multiple trading partners, Trump made a big U-turn, delaying most of the levies on Canada and Mexico until April. But others, including on steel and aluminium due to take effect on Wednesday, and increased tariffs on China, remain in place.
The drumbeat of comments from top Trump officials playing down fears of stock market trouble has been consistent.
Treasury secretary Scott Bessent fanned investor concerns at the weekend, when he appeared to dismiss the idea that Trump would curtail some of his economic policies if the stock market were to keep tumbling.
“There’s no put,” he said. “The Trump call on the upside is, if we have good policies, then the markets will go up.”
Bessent also said the US economy might need a “detox period” to be less dependent on government spending.
“There’s going to be a natural adjustment as we move away from public spending to private spending,” he said. “The market and the economy have just become hooked. We’ve become addicted to this government spending. And there’s going to be a detox period.”
For Trump, “time is the only constraint”, said Barry Bannister, chief equity strategist at US bank Stifel. “Year one of any new administration is the time to break some eggs to make an omelette and the [Trump] administration’s ambitions are a broad revamp of the economic order.”
But the risk that growth cools and inflation rises — known as stagflation — is growing as Trump presses ahead on tariffs on America’s biggest trading partners, he added, leaving US equities exposed to a “pincer movement” of potentially slowing earnings per share and lower price to earnings ratios.
“Will [Trump] have the fortitude to take serious pain? That’s an open question,” said Shep Perkins, chief investment officer at Putnam Investments.
