The market's "insensitivity" is showing! Trump's tariff threats are losing their magic, and US stocks are emerging from panic mode

According to Zhitong Finance APP, after experiencing severe fluctuations in stock prices due to tariff negotiations in April, the market now shows signs of fatigue regarding new developments in the trade war. For example, last Friday, when Trump stated that he would soon impose tariffs on many countries due to his team's lack of time to negotiate with all nations, the stock market barely moved. Similarly, the news of the EU submitting a revised trade proposal this week, which includes a gradual zeroing out of tariffs on multiple products, also failed to stir any waves.

Market observers point out that this indifferent attitude stems from investors' general belief that the triple hit of stocks, bonds, and currencies in April has taught Trump a lesson—at that time, the fully erupted market crisis forced him to suspend most of his tariff plans. Therefore, the market expects that the final tariff plan will be far less severe than initially threatened and is not a cause for concern. This optimistic sentiment has driven U.S. stocks to steadily rise over the past six weeks.

Marshall Front, Chief Investment Officer of Front Barnett Associates LLC, stated, "The market has recognized Trump's style of making a lot of noise but little action. Investors believe that the actual tariff intensity will be much lower than early expectations, and this judgment is accurate."

Dennis DeBusschere of 22V Research noted that the sensitivity of the S&P 500 index to tariff news has significantly decreased since April.

The company uses principal component analysis to measure market volatility, a statistical method that identifies key influencing factors by analyzing vast amounts of index performance data. The data shows that currently, only about one-third of the daily fluctuations in the S&P 500 index are related to tariff news, a significant drop from the 80% peak in early April.

Front stated, "Multiple pressures are forcing Trump to adopt a moderate tariff policy. The main pressure comes from the financial markets—widening spreads between high and low-rated bonds and severe stock market volatility are signals he cannot ignore."

After the tumultuous events of April, the market has gradually calmed in May. The S&P 500 index experienced a daily volatility peak in early April not seen since the 2008 financial crisis, but it has now returned to normal levels.

The temporary trade truce between China and the U.S. has eased market tensions, and the agreement between the U.S. and the U.K. also indicates progress, albeit slow.

A trade policy uncertainty index, which soared in April, has now returned to levels seen before Trump's tariff plans were announced, highly synchronized with the S&P 500 index's movements.

Front stated, "The fear of tariffs has significantly diminished, but the policy remains unpredictable."

Macroeconomic Shocks

However, other risk factors are emerging. After Moody's stripped the U.S. of its AAA rating, a lackluster demand in U.S. debt auctions raised concerns, leading to setbacks in both the stock and bond markets.

22V Research indicates that any event could become a key variable influencing the market—for example, the COVID-19 pandemic in 2020 contributed to 70% of the S&P 500 index's volatility Kevin Brocks from 22V stated: "The stock market remains susceptible to macro shocks, but unless a shock occurs, fundamentals will regain pricing power." Despite weak corporate outlooks, the overall first-quarter earnings reports exceeded expectations, and several economic data points indicate that the pessimistic expectations from previous sentiment surveys may have been overstated.

As a result, the synchronized movement trend commonly seen during significant macro shocks has also weakened.

Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, said: "We are entering a new phase of divergence between data and opinions. This will maintain lower market correlation, and individual stock performance will depend more on micro fundamentals rather than being swept up by macro news as it was at the beginning of the year."