At least for now, the U.S. stock market is on board with President Donald Trump\u2019s increasingly aggressive use of executive power when it comes to tariffs.<\/p>\n\n\n\n
On Tuesday, major stock indexes hit fresh all-time highs as investors digested an inflation report that was mostly tamer than feared<\/a>. While the details of the report suggest an overall mixed picture for the economy, it suggested fears of large immediate price increases from Trump\u2019s tariffs may no longer be warranted.<\/p>\n\n\n\n \u201cMany prices will end up rising in time due to tariffs, but we don\u2019t see inflation pressures persisting,\u201d James Knightley, chief international economist at ING, said in a note to clients. \u201cWe are in a very different situation to 2021\/22 when inflation soared to 9%.\u201d<\/p>\n\n\n\n While the rate of inflation for some goods exposed to tariffs picked up in July, it was weaker for others, like appliances and apparel. Last month\u2019s heavier price increases were instead mainly found in service sectors like airfare and auto insurance rates.<\/p>\n\n\n\n \u201cThe strength was concentrated to a few specific components and not broad based,\u201d analysts with Citi said in a note.<\/p>\n\n\n\n Tariffs are costs added to imports in the form of taxes. Goldman Sachs analysts have estimated that consumers have been responsible for as much as 22% of the cost increases, with the percentage set to climb as the tariffs work their way more fully into supply chains \u2014 though Trump attacked Goldman\u2019s estimates Tuesday. Efforts by firms to stockpile goods ahead of the tariffs\u2019 impacts, as well as summer discounts and ongoing tariff deadline extensions by Trump, have insulated consumers from further effects.<\/p>\n\n\n\n Tariffs continue to get negative reaction in surveys, with a mid-July Fox News poll showing Americans disapproved of Trump on tariffs<\/a> by a 26-point margin. That was virtually unchanged from April, when Trump revealed shock new tariff levels in his Rose Garden \u201cLiberation Day\u201d speech announcing soaring new import duty levels.<\/p>\n\n\n\n Stocks, meanwhile, continue to shrug them off. After Tuesday\u2019s inflation report, traders increased the odds of a rate cut by the Federal Reserve at its next meeting in September. When markets expect the Federal Reserve to loosen financial conditions and make it easier for businesses to borrow money, stocks tend to rise because firms will have to pay less money in interest.<\/p>\n\n\n\n Stocks\u2019 recent behavior is in stark contrast to their dramatic spring sell-off in the wake of April\u2019s \u201cLiberation Day\u201d speech. Investor reaction was so intense that Trump instituted a 90-day pause to reconsider what was set to be a cornerstone of his second administration\u2019s economic policy.<\/p>\n\n\n\n Today, Trump\u2019s focus on tariffs hasn\u2019t abated \u2014 but he has dialed back the more maximalist tariff levels he initially outlined. Combined with signs of a shakier labor market, investors are more convinced that the Fed will err on the side of supporting the economy by lowering interest rates to support overall business activity.<\/p>\n\n\n\n The performance of the stock market itself isn\u2019t a full picture of the broader economy, however. Instead, the gains of the S&P 500 and the Nasdaq increasingly reflect the outsized returns of a handful of tech companies that investors believe will reap massive gains from their investments in artificial intelligence technology.<\/p>\n\n\n\n The so-called Magnificent Seven tech stocks \u2014 Alphabet (Google\u2019s parent), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla \u2014 now account for one-third of the weighted average of the S&P 500, the broadest index of stocks Reuters reported last month<\/a>, citing data from LSEG Datastream consultancy.<\/p>\n\n\n\n According to analysis from Morgan Stanley<\/a>, at the end of July, just 9% of companies that make up the S&P 500 were at 52-week highs.<\/p>\n\n\n\n The index\u2019s movements are thus now heavily correlated with changes to the outlook of a handful of companies. If just one of them underperforms, it can take the entire market down with it.<\/p>\n\n\n\n \u201cWhen a handful of stocks dominate the market … if you do have a period of disappointment from those stocks, you could see disproportionate impacts on your portfolio from just a handful of company-specific issues,\u201d Michael Reynolds, vice president of investment strategy at Glenmede financial group, told Reuters.<\/p>\n\n\n\n Small businesses remain especially vulnerable to the impact of tariffs, since they have less pricing power than larger firms. The National Federation of Independent Businesses, the country\u2019s largest small-business trade group, reported Tuesday<\/a> that a shrinking share of respondents say they are profitable.<\/p>\n\n\n\n \u201cIncreased costs are affecting everyone. I believe things will improve, but it will take time \u2014 six to 12 months. I just hope small businesses can hold on that long,\u201d the NFIB quoted an unnamed fabricated metal product manufacturing firm in Michigan as saying in a July report<\/a>.<\/p>\n\n\n\n The U.S. economy isn\u2019t out of the woods yet, said Kevin Gordon, director and senior investment strategist at Charles Schwab financial group. Wednesday, the Bureau of Labor Statistics will report a separate measure of inflation that tracks wholesale inflation, or what producers get for their products and which tends to be more closely watched by the Federal Reserve. If it shows more pronounced signs of inflation than what Tuesday\u2019s report suggested, stocks could quickly come down from their new highs.<\/p>\n\n\n\n Barring that, conditions remain more benign than feared, he said, potentially setting the stage for further stock gains.<\/p>\n\n\n\n \u201cWeaker growth is not a concern at the moment,\u201d he said. \u201cYes, there\u2019s been some pullback, but it doesn\u2019t mean we\u2019re in any kind of recessionary scenario.\u201d<\/p>\n\n\n\n