Market Mondays: Equities Shrug Off Trade Threats—but Correction Risk Builds
Authors: Daniela Hathorn and Kyle Rodda
Date: 14 July 2025
Overview
Despite escalating geopolitical tensions and trade threats, particularly from the U.S. regarding tariffs on the European Union, equity markets have shown remarkable resilience. The anticipated tariffs, which could reach up to 30%, have not yet resulted in the expected market volatility, as investors maintain a hopeful outlook for potential trade deals.
Market Sentiment
Investor sentiment appears to be grounded in the belief that the tariff threats are largely rhetorical, serving as a negotiation tactic rather than a definitive policy. Historical patterns suggest that many of the threats made during Trump's presidency did not materialize, leading markets to adopt a similar expectation this time around. This creates a significant asymmetry in market pricing, where optimism is heavily priced in, but potential downsides are not adequately accounted for.
Current Market Dynamics
U.S. indices, including the S&P 500 and Nasdaq, have reached new record highs, buoyed by positive trade news and a strong risk appetite among investors. However, European equities are beginning to show signs of strain, with indices retracting recent gains as the reality of potential trade retaliation becomes more apparent. The looming August 1 deadline for tariff implementation adds urgency to the situation, with investors at risk of being caught off guard if negotiations falter.
Potential Outcomes
There remains potential for further market upside if trade negotiations yield favorable results, such as avoiding or softening the proposed tariffs. While much positive news is already reflected in current valuations, there is still room for growth. A successful resolution could eliminate the existing risk premium, reigniting investor confidence and extending the current rally, particularly in the technology sector, which is poised for a strong earnings season.
Valuation Insights
U.S. equities are currently trading above their 10-year average on a price-to-earnings basis, yet there has been a slight decline in multiples since earlier in the year. This suggests that a modest discount is still being applied due to unresolved trade risks. If these risks are alleviated, valuations could expand further, supported by improved market sentiment and earnings optimism.
Conclusion
The market is at a critical juncture, driven by optimism and assumptions about political behavior. The upcoming August 1 deadline will test these assumptions, with the potential for a significant market correction if trade tensions escalate. Until then, the market remains poised for both upward movement on positive news and a sharp downturn if the situation deteriorates.