Macroscope | Why investors banking on ‘peak Trump’ are dangerously wrong

In the past month, Wall Street banks have come out with their midyear outlooks for the global economy and markets. The tone and substance of the reports are markedly more upbeat than the research published as recently as early May.

In fact, the underlying theme running through the outlooks is that “peak Trump” has passed. Granted, markets are short-sighted and the so-called Taco trade – an investment strategy based on expectations that Trump always chickens out, especially when it comes to imposing punitive tariffs – reinforced the perception that Trump’s bark is worse than his bite. However, the assumption that the president’s capacity to do harm is diminishing is a gross misreading of the risks posed by his return to the White House.

With global stock markets at an all-time high, it is a view that needs to be taken seriously. The case for peak Trump has three components. First, the US economy and companies have proved more resilient to the trade shock than expected. Predictions that the onslaught of protectionism would lead to a recession and a renewed surge in inflation have so far failed to materialise.

Second, despite all the talk about the end of the period of “US exceptionalism”, the country’s leading technology companies have driven a sharp rally in equities since late April, powered by strong earnings and the artificial intelligence boom. Furthermore, there is so far little evidence of foreign outflows from US bond and equity markets, casting doubt over the willingness of overseas investors to reduce their exposure to US assets.

Third, the focus of US President Donald Trump’s agenda has shifted from trade to tax cuts and deregulation, the parts that appeal to the financial and business community. The US Federal Reserve, moreover, could begin cutting interest rates later this year.