07/14/2025

US trade policy has entered a phase of acute uncertainty. As the deadline to implement new reciprocal tariffs is extended, the messages out of Washington are getting increasingly aggressive. Although agreements have only been reached with the United Kingdom and Vietnam, letters have been sent to other countries listing the tariffs set to take effect on August 1, which essentially maintain the rates announced on what was dubbed “Liberation Day.”

At the same time, exceptional cases are ramping up. Brazil has been threatened with a 50% tariff, justified not on trade grounds but due to domestic political issues, such as the trial of former President Bolsonaro and alleged censorship of American social media platforms. Similarly, a 10% tariff has been floated for the BRICS countries, citing their supposed attempts to undermine the dollar’s role as the global reserve currency. This shift toward using tariffs for political purposes marks a turning point in trade policy, increasing uncertainty about which countries might face sanctions and how severe they could be.

Sector-based tariffs are also expanding. Copper has been the first to be hit, with a 50% tariff imposed on the grounds of national security and the desire to boost domestic production. Although its direct impact is limited due to copper’s relatively small share of total imports, it sets a precedent that could extend to strategic sectors such as semiconductors and pharmaceuticals. In the latter case, Trump himself has hinted at tariffs as high as 200%, which would have major consequences for prices and supply chains.

To further complicate the landscape, over the weekend the Republican announced new 30% tariffs on imports from Mexico and the European Union starting August 1, marking a direct escalation in the White House’s trade strategy. While Trump has left the door open to revisions if agreements are reached before that date, the tone of the letters sent to both regions’ governments indicates a desire to impose terms rather than seek mutual compromise.

However, amid all the tension and threats, financial markets appear surprisingly unfazed. Despite the sharp rise in risk that tariffs could return to the peak levels announced on April 2, major stock indexes remain at all-time highs. Nvidia, the flagship of the artificial intelligence boom, has reached a $4 trillion valuation, pushing the S&P 500 to levels that now account for nearly half of global GDP. Only assets directly affected by the recent news, like copper or the Brazilian real, have shown significant reactions.

This bullish sentiment in the markets seems to rest on two main pillars. First, economic data continue to show resilience: neither inflation nor employment has yet reflected any negative impact from the tariffs. Second, there’s a prevailing perception that, since these are unilateral decisions by the presidency, the tariffs can easily be reversed if their consequences turn out to be damaging. This notion acts as a kind of safety net for investors.

However, this dynamic could create a feedback loop: if markets interpret the tariffs as harmless and react positively, it may encourage the U.S. president to continue toughening his stance. In fact, Trump recently stated that the market is responding well to his policies, which could reinforce his conviction to introduce further disruptive measures.

Over the coming days, however, there are no expectations that data will interrupt the currently favorable environment for global stock markets. June inflation in the United States is expected to remain subdued, while the fiscal stimulus from Trump’s budget proposal may provide some support to growth. At the same time, a new earnings season is about to begin, and consensus points to modest year-over-year growth in S&P 500 earnings per share, with many analysts believing that the currently conservative estimates leave room for positive surprises. If this expectation holds, earnings could act as a short-term catalyst for the markets.

Ultimately, we are aware that market momentum is powerful and could continue driving major stock indices higher, even in the absence of fundamental justification. However, we view the market’s current complacency with concern, given the growing fragility underlying this apparent balance. Markets are still clinging to the belief that Trump will back down before causing real economic damage, but the risk of a misstep rises in tandem with the Republican’s increasingly aggressive rhetoric.