Trump’s New Tariff Threats May Shake Stocks’ Rally as Investors Brace for a Long, Hot Summer

As the summer months roll in, investors thought they could momentarily catch a break from tariff tensions. However, President Donald Trump’s recent threats of new tariffs against the European Union and Apple have propelled trade discussions back into focus, leaving stocks vulnerable to volatility. With mounting concerns surrounding growing U.S. government debt, high Treasury yields, and fluctuations in global bond markets, investors brace for an uncertain season ahead.

James Knightley, chief international economist at ING, aptly summarized the situation in a note, stating that the “escalation – de-escalation and now re-escalation” of Trump’s trade war is likely to dominate market sentiment in the upcoming weeks. Trump’s latest proposal to impose a staggering 50% tariff against the European Union and a 25% tariff on Apple’s iPhones sold in the U.S. reignited investor fears. These threats raise concerns over a potential resurgence of inflation and a slowdown in U.S. growth, which had previously been alleviated by recent positive developments in trade negotiations.

The Shift in Market Sentiment

After a period of relative calm where Trump had temporarily paused reciprocal tariffs for 90 days (excluding China), investors had initially responded positively, pushing stocks to new highs. A recent deal between the U.S. and China to cut tariffs had also fueled this optimism. However, the renewed threat of tariffs brings a sense of uncertainty back into play, according to Richard Flynn, managing director at Charles Schwab UK. He noted that “the longer the tariffs are in place at those elevated levels, the more you’re risking things like higher inflation or lower growth.” Thankfully for markets, there has not yet been a tangible rise in inflation attributed to tariffs, as evidenced by the Federal Reserve’s preferred personal consumption expenditures price index, which rose 2.3% year-over-year in March.

The Bigger Picture: Government Debt and Bond Yields

As investors recalibrate their financial strategies, they cannot ignore concerns regarding U.S. government debt surging to unprecedented levels. Long-dated Treasury yields have remained elevated, with the 30-year Treasury yield surpassing 5% last Friday. Such conditions are dampening investor sentiment in the stock market since increased borrowing costs can weigh heavily on corporate profits.

Additional pressures emerged from the disappointing auction results of a $16 billion 20-year Treasury bond, compounded by Moody’s downgrade of the U.S. credit rating. As the House of Representatives passed a rigorous tax and spending bill predicted to escalate the deficit further, the possibility of economic stability seemed increasingly tenuous. George Saravelos, head of FX research at Deutsche Bank, highlighted that the current rise in yields is driven more by fiscal risk rather than optimism in U.S. growth, which poses a significant risk to stock performance.

Global Influences: Japan’s Rising Bond Yields

In a troubling development, Japan’s bond yields have also surged, which could further impact U.S. assets. Japanese financial institutions are significant buyers of U.S. Treasuries, contributing to a dynamic known as the yen-funded carry trade. Should rising yields in Japan lure domestic investors back, it might lead to a substantial withdrawal from U.S. financial assets, resulting in heightened volatility. Strategists at Macquarie Group have called attention to this risk, indicating that increasing Japanese government bond yields could instigate a rebalancing of portfolios away from U.S. Treasuries.

Summer Performance Trends

The combination of these fiscal pressures and trade uncertainties could make for a bumpy ride for stocks as they head into summer, a notably poor performing season for equities historically. Data shows that on average, the S&P 500 has recorded only a 1.2% gain during the summer months since 1950, which is considerably lower than its performance in spring (2.4%), fall (2.2%), or winter (3.1%). With investors facing multifaceted challenges, the road ahead appears replete with hurdles.

Conclusion

As the summer of 2025 approaches, the stock market faces a tempest of trade, fiscal, and global bond market factors that may temper investor enthusiasm. The looming threats of tariffs from President Trump could act as catalysts for volatility, while rising U.S. government debt and foreign bond yields present substantial headwinds. While some market participants still hope for positive trade resolutions, the prevailing atmosphere suggests caution as investors navigate the uncertainties ahead.