Wall Street: The risks behind Trump’s bullish mirage

Donald Trump has been president of the United States for little more than a month and few things have turned out as expected at the beginning of last November, when he won the election. Investors and citizens had been forewarned of the significance of his electoral promises, but reality is now imposing caution, if not outright concern, in the face of economic measures that have dispelled the initial optimism with which Trump was received. Beyond the tariffs, which have yet to materialize as announced, U.S. economic indicators suggest a rise in inflation and a decline in confidence that is taking hold in Wall Street. The intensity of this trend, and how the powerful U.S. financial market reacts, will determine the measures to be adopted by the White House, experts warn.

US inflation expectations and consumer confidence are not what they were when Trump won the presidential election on November 5. January marked the fifth consecutive month of rising headline inflation, which reached levels not seen since June, and core inflation, which had moderated last month, returned to 3.3%, the level at which it stagnated during the second half of last year. The first month of the year is usually one of price adjustments, in which updates arise that correspond to the previous year and often cause punctual rises in inflation, but experts at CaixaBank Research believe that the data point to the persistence and rebound of some inflationary pressures. “January’s data do not suggest good progress in the disinflationary process. The last mile of inflation will not be an easy road, and although January may be just a stone on the road, this data will only serve to reinforce the caution that the Fed will take ahead of 2025″, they explain. The PCE index, a personal consumption expenditures deflator that is one of the Fed’s favorite inflation indicators, did provide some relief on Friday. It fell in January by one-tenth of a point to 2.5%, as expected, while the underlying rate, excluding fresh food and energy, was 2.6% year-on-year, two-tenths of a point lower than the previous month. Even so, five-year inflation expectations reflect a clear rise in recent months, from 2.3% before Trump’s victory to 2.6% today.

In terms of confidence indicators, the Conference Board’s consumer confidence indicator showed that U.S. consumer confidence plummeted in February to the lowest level in eight months, while expectations are below 80 points, a level the firm considers to be a precursor to recession. The University of Michigan’s February consumer confidence gauge, released a week ago, fell to the lowest level in 15 months and showed that inflation expectations have shot upward, largely because of the threat of new import tariffs.

These risks to U.S. growth do not explain the underperformance of U.S. indices since the beginning of the year. Rather, this is related to a broadening effect in financial markets, with investors looking for cheaper markets, such as Europe and China

Nabil Milai, Edmond de Rothschild AM

Paolo Zanghieri, senior economist at Generali Investments, recalls that the trade war of Trump’s first term already showed how the impact of tariffs is quickly passed on to economic activity and employment. “This time the threat of tariffs involves a much wider range of goods, with possibly a much greater impact. Consumers have taken notice and the inflationary impact of tariffs is the main source of concern for both the consumer, businesses and markets,” explains Zanghieri.

Nabil Milali, multi-asset manager at Edmond de Rothschild AM, is blunt in his assessment of the first weeks of Trump’s term and says that although his election victory was seen as positive for growth, “the first announcements are negative in general, which encourages a more cautious attitude towards the U.S. economy”. In his opinion, the strength of recent quarters was largely driven by private consumption, but the economic uncertainty fueled by Trump is beginning to be reflected in household confidence indicators and could translate into a slowdown in consumer spending. He further notes that despite the brilliant Q4 2024 earnings campaign, “companies are no longer as optimistic as they were after Trump’s victory, not least because of the trade war, while the long-awaited tax reform is only expected to extend the tax cuts already in place without additional cuts.”

In the same vein is Connor Fitzgerald, fixed income portfolio manager at Wellington Management, who believes that “the Trump administration’s actions since taking office have been negative for growth.” The manager even advocates that tariffs could be more of a drag on that growth than an upside factor for inflation. “While Trump may be using them as a bargaining tool, they appear to be the only significant source of funds in his economic plan. In other words, the administration may need tariffs to fund extensions of tax cuts and new stimulus,” he asserts.

For Paolo Zanghieri, there are several latent risks in the US economy that could surface depending on Trump’s policies. The economist argues that inflation is still too high, and disinflation has almost stalled at the end of the year. “The recent worsening consumer sentiment is largely related to the rise in expected inflation. This only partly reflects fears about tariffs. Prices for services (which in principle are not affected by tariffs) continue to rise at too fast a pace,” he explains. In addition, interest rates remain high, impacting construction and preventing a clear decline in mortgage interest, which affects domestic demand.

Counting on a tariff policy less fierce than initially advertised, Citi expects a significant slowdown in real GDP growth, although without entering a technical recession, and an increase in the unemployment rate. The cause is none other than the delay with which the rate cuts are being passed on to the economy and the weakening already observed in the labor market. The US bank also warns that “the fiscal policies of the new administration are a source of uncertainty for the outlook over the next two years.”

Analysts expect the US public deficit to remain between 6% and 7%, a high level that does not allow investors to lower their guard against possible deviations in fiscal discipline. Added to this is the impasse in which the Fed has left the interest rate cuts and which aggravates the interest burden on the high volume of U.S. debt. Thus, according to interest rate futures, the Fed is likely to resume cutting the price of money by mid-year, albeit with relative conviction. The probability of a quarter-point cut at the June meeting is now 54%.

The analysis of the U.S. economy thus presents challenges that Trump may not be oblivious to and that the market has begun to partly discount, even if there is also no doubt about the country’s ability to grow, especially in the near term. “In the shorter term, the U.S. credit rating remains underpinned by the country’s key strengths, including the dollar’s unrivaled role as the main reserve currency and capital markets that offer ample and affordable financing to U.S. companies,” argues Eiko Sievert, senior director of public sector and sovereign at Scope Ratings. The agency forecasts U.S. GDP growth of 2.7% this year and 2.2% in 2026, with inflation at 3.1% in 2025 and 2.7% next year.

And does this expected lower growth, which could be exacerbated by Trump’s policies, justify the performance gap that has opened up this year between the European stock market and Wall Street? In Nabil Milali’s opinion, no. “These risks to U.S. growth do not explain the underperformance of U.S. indices since the beginning of the year. Rather, this is related to a broadening effect in financial markets, with investors looking for cheaper markets, such as Europe and China,” he explains.

Sign up for our weekly newsletter to get more English-language news coverage from EL PAÍS USA Edition