Trump’s new tariff threats may shake stocks’ rally as investors brace for a long, hot summer

Just as investors thought they could take a break from the tariff scares, President Donald Trump’s threats of new levies against the European Union and Apple threw trade tensions back into focus ahead of a long holiday weekend.

That’s a reminder to stock market investors that tariffs will likely remain a factor this summer as they navigate a volatile macroeconomic environment with concerns around growing U.S. government debt, elevated yields for long-dated Treasurys, and a jump in Japan’s bond yields that may trigger further outflow from U.S. assets.

“Escalation – de-escalation and now re-escalation” of Trump’s trade war is going to be the theme that drives the market this week, James Knightley, chief international economist at ING, wrote in a recent note.

Knightley made the comment after Trump last Friday threatened to impose a 50% tariff against the European Union, effective on June 1, and a 25% tariff on Apple AAPL for any iPhone sold, but not made, in the U.S. On Sunday, Trump extended his deadline on E.U. tariffs until July 9.

The move reignited fears among investors that the new tariffs may lead to a re-acceleration of inflation and a slowdown in U.S. growth, after progress on the trade front earlier led to a market rally. Last month, Trump paused the implementation of reciprocal tariffs for 90 days for most countries except China. Earlier this month, the U.S. and China reached a temporary deal to slash tariffs on each other.

Stocks had plunged after Trump initially rolled out his reciprocal tariff plans on April 2, but then roared back as he began scaling back or delaying the levies.

However, now as Trump threatened to implement new tariffs, “the uncertainty doesn’t seem to be going away,” said Richard Flynn, managing director at Charles Schwab UK.

While the market responded “very positively” to any pauses in tariffs and the progress in trade conversations earlier, “nearly every major market is still subject to pullbacks if trade talks fail between the countries,” Flynn said in a phone interview.

Notably, “the longer the tariffs are in place at those elevated levels, the more you’re risking things like higher inflation or lower growth,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

On the bright side, there hasn’t been much material increase in the inflation rate yet due to tariffs, Ripley noted. The personal consumption expenditures price index data, the Federal Reserve’s preferred measure of price gains, showed inflation decelerating in March, hitting 2.3% year-over-year. The 12-month rise in the consumer price index, another major inflation gauge, slowed to 2.3% in April from 2.4% in the prior month, its smallest increase since 2021.

This week, investors will be watching the April PCE data due on Friday.

Some investors also argued that the tariffs threats are simply Trump’s negotiation tactics. The president is unlikely to let the tariffs cause real damages to the economy, as evidenced by the pauses of his first round of levies, said Jamie Cox, managing partner at Harris Financial Group. There are still upsides facing the market as Trump may reach trade deals with more countries going forward, in addition to the one signed with the U.K. earlier this month, Cox said in a call.

U.S. stocks ended the week lower, as the Dow Jones Industrial Average DJIA trade down 1051.67 points or 2.5% to close at 41,603.07. The S&P 500 SPX lost 155.56 points or 2.6% for the week to finish at 5,802.82. The Nasdaq Composite COMP declined 473.89 points or 2.5% to end the week at 18,737.21.

The three major indexes also finished Friday lower, while trimming initial losses, as investors debated whether the tariffs Trump threatened will actually be implemented. “I would be shocked if these proposed tariffs are imposed,” said Louis Navellier, chairman and founder of Navellier & Associates.

Still, adding to the pressure facing stocks is the growing concern over the U.S. government’s massive debt and the elevated yields of long-dated Treasurys, as the 30-year Treasury yield stood above 5% as of last Friday, which tended to be negative for stocks, as it increased borrowing costs for companies.

A combination of factors weighed on bond investors’ sentiment last week, as a $16 billion auction of 20-year Treasury bonds produced lackluster results, after Moody’s stripped the U.S. of its last triple-A rating. The U.S. House of Representatives last week also passed a tax and spending bill that would enact most of Trump’s policy agenda and is projected to further increase the deficit.

While in 2023 and 2024, the U.S. saw a rise in both Treasury yields and equities, it is unlikely to happen today, George Saravelos, head of FX research at Deutsche Bank, wrote in a recent note. Back then, both Treasury yields and stocks were up as the U.S. growth rate was revised higher than expected.

However, the recent rise in yields is not due to optimism in growth, but because of the concerns over the U.S.’s mounting debt deficit. “It is all a building fiscal risk premium into US assets,” Saravelos noted.

Making things worse is the recent tumultuous rise in Japan’s bond yields.

Japan’s financial institutions are known to be big buyers of the U.S. Treasurys and have played a major part in the yen-funded carry trade, which involved borrowing in yen to buy a higher-yielding currency like the dollar, which was then invested in U.S. Treasurys.

However, if the sharply higher yields on Japanese government bonds attract domestic investors back, the unwinding of the carry trade could lead to a substantial withdrawal from U.S. financial assets.

Read: Investors have been rattled by a rising U.S. bond yield. They should be more worried about Japan.

“What should concern holders of USTs (U.S. Treasurys) and USDs (U.S. dollars) now is that, at some point, JGB (Japanese government bonds) yields are allowed to rise far enough that it triggers a sudden rebalancing of Japan’s institutional portfolios out of USTs and into JGBs,” strategists at Macquarie Group, wrote in a Thursday note.

All that was on top of the seasonality that tends to work against stocks in the summer.

Summer is the worst performing season for stocks, as the S&P 500 on average logged a 1.2% gain in the summer since 1950, compared with a 2.4% gain in the spring, a 2.2% increase the fall and a 3.1% rise in the winter, according to the Dow Jones Market Data.