The financial markets are doing that thing again — you know, where they completely ignore what every economics textbook says they should be doing.
April's tariffs are approaching their expiration date, and yet the markets keep climbing merrily toward all-time highs. It's one of those head-scratching disconnects that makes financial markets so fascinating (and sometimes utterly maddening) to follow.
Look at the evidence: We've got tariffs. Multiple active wars. Oil prices doing their roller coaster impression. And yet... the S&P and Nasdaq are behaving like college freshmen who just discovered their parents' credit card has no limit.
What gives?
I've been covering market reactions to trade policy since the first Trump administration, and I've found something I call the Multiple Narratives Theory particularly useful when markets seem to defy logic. Investors aren't responding to just one storyline but constantly shifting their attention between competing narratives based on whatever best explains the latest batch of data.
Back in April, the narrative was dead simple: tariffs plus global conflicts equals market pain. Made perfect sense.
Then something weird happened — or rather, didn't happen. The economic slowdown everyone expected never really showed up. Corporate earnings stayed strong. Consumers kept spending like tomorrow wasn't a concern. The labor market refused to roll over and play dead.
As these contradictory signals piled up, the market's dominant narrative underwent a dramatic shift. The new story? "Maybe this economy is tougher than we thought, and these tariffs aren't actually that big a deal."
Markets aren't perfectly efficient — despite what some of my more orthodox economist friends might insist after a couple of drinks — but they are pretty good at processing new information. That initial April dip represented uncertainty (and markets hate uncertainty even more than they hate bad news). But once companies started reporting earnings suggesting they could handle the tariff environment, investors adjusted their positions accordingly.
There's also the matter of adaptation. Companies don't just sit there taking punches. They react. They adjust supply chains, lean on suppliers for concessions, tweak pricing, find creative workarounds. The first round of tariffs years ago taught corporate America some valuable lessons about navigating these waters.
Many businesses had already been diversifying away from China for years due to previous tariffs and COVID-related disruptions. The new tariffs merely accelerated existing trends rather than creating entirely new problems.
Then there's simple math. In a $27 trillion economy, even billions in tariffs represent a relatively small percentage impact. Critical for specific industries? Absolutely. Economy-destroying? Not necessarily.
I've noticed that conventional wisdom about recessions has been spectacularly wrong lately. Remember when the pandemic was supposed to trigger a depression? Or how inflation would never normalize without massive unemployment? After so many failed doomsday predictions, markets have developed a certain immunity to recession forecasts.
That said, we're not necessarily in the clear. Monetary tightening takes time to fully impact the system. Consumers have been drawing down savings. Companies need to refinance debt at higher rates. The tariff effects might simply be taking longer to manifest than initially expected.
The interesting question now is what happens when these tariffs expire. Will their removal provide another boost for markets? Or have companies and investors already adapted to the point where their expiration becomes a non-event?
My hunch, after speaking with several fund managers off the record, is that we've entered a period where markets care less about political pronouncements and more about actual economic data. Six months ago, tariff announcements sent markets into a tizzy. Now they barely get mentioned in earnings calls.
(A quick but important aside: markets aren't the economy. Indices can hit record highs while specific sectors struggle. Just ask anyone working in shipping, agriculture, or certain manufacturing segments how those tariffs are treating them.)
So what's the next chapter in this story? I'd watch closely whether companies start explicitly mentioning tariff relief in their forward guidance. If they do, it suggests the tariffs were more impactful than broad market action indicated. If they don't... well, that reinforces the idea that this round of tariffs was more political theater than economic earthquake.
Either way, I find myself amused — and occasionally frustrated — by our collective tendency to overestimate short-term impacts while underestimating long-term structural changes. The market's resilience isn't necessarily irrational. It's just operating on a different timeline than our breathless news cycles.
