Investors Brace for a Hot Summer as New Tariff Threats Could Shake Stocks' Rally

Just as investors hoped for a reprieve from tariff-related turmoil, President Donald Trump reignited trade tensions by threatening new levies against the European Union and Apple. These fresh threats brought geopolitical risk back into the spotlight just before the long holiday weekend, reminding market participants that trade-related uncertainty could continue through the summer.

‍

Trump’s latest announcements included a proposed 50% tariff on goods from the European Union starting June 1 and a 25% tariff on Apple for iPhones sold in the U.S. but not manufactured domestically. The news quickly unsettled investors, reviving fears that further tariffs could accelerate inflation and hinder U.S. economic growth. This concern comes after a recent wave of optimism fueled by trade progress, including a temporary U.S.-China deal and a 90-day pause on tariff implementation for most countries, excluding China.

‍

James Knightley, chief international economist at ING, described the situation as a pattern of “escalation, de-escalation, and now re-escalation,” suggesting that renewed trade conflict would likely dominate market sentiment this week. Earlier in April, stocks sold off sharply when Trump initially announced reciprocal tariffs but recovered as he later delayed or eased those measures. Now, with the possibility of new tariffs on the table, the market faces renewed uncertainty.

‍

Richard Flynn, managing director at Charles Schwab UK, emphasized that the market had previously reacted positively to any easing in trade tensions, but warned that “nearly every major market remains vulnerable to pullbacks” if trade negotiations falter. Charlie Ripley, senior investment strategist at Allianz Investment Management, noted that prolonged tariffs could bring risks such as higher inflation and slower economic growth. However, he pointed out that inflation has not yet risen significantly due to tariffs.

‍

For instance, the personal consumption expenditures (PCE) price index—a key inflation measure for the Federal Reserve—decelerated to a 2.3% annual rate in March, while the consumer price index (CPI) saw a similar decline in April.

‍

Investors will be closely monitoring the upcoming April PCE data, due Friday, to assess whether inflation remains under control.

‍

Some market participants believe Trump's tariff threats are more about negotiation tactics than actual economic policy. Jamie Cox of Harris Financial Group argued that Trump is unlikely to push measures that could inflict real economic harm, noting how previous threats were often followed by delays or adjustments. Cox added that further trade agreements, like the one signed with the U.K. earlier this month, could offer more upside for markets.

‍

Still, the stock market closed lower for the week. The Dow Jones Industrial Average fell by 1,051.67 points or 2.5% to finish at 41,603.07. The S&P 500 dropped 155.56 points or 2.6%, closing at 5,802.82.

‍

The Nasdaq Composite also declined by 2.5%, ending the week at 18,737.21. While Friday’s losses were partially trimmed by the close, investors remained skeptical about whether the tariffs would actually be implemented. Louis Navellier of Navellier & Associates said he would be “shocked” if the proposed levies took effect.

‍

Beyond trade tensions, investors are also contending with broader macroeconomic challenges, including growing U.S. government debt and rising long-term Treasury yields. On Friday, the 30-year Treasury yield stood above 5%, raising borrowing costs and putting additional pressure on stocks. A $16 billion auction of 20-year bonds disappointed investors, further denting confidence, especially after Moody’s downgraded the U.S.’s last remaining triple-A credit rating.

‍

The House of Representatives recently passed a tax and spending bill aligned with Trump’s policy agenda, expected to further widen the federal deficit. George Saravelos, head of FX research at Deutsche Bank, noted that unlike in 2023 and 2024—when rising Treasury yields were paired with a positive economic outlook—the recent uptick in yields reflects deepening concerns over U.S. fiscal sustainability. Investors are increasingly pricing in a “fiscal risk premium” for U.S. assets, he said.

‍

Compounding these concerns is a sharp rise in Japanese government bond (JGB) yields. Japan’s financial institutions have long been major buyers of U.S. Treasurys, often using the yen-funded carry trade—borrowing in low-yielding yen to invest in higher-yielding U.S. assets. However, rising JGB yields could entice Japanese investors to shift funds back home, potentially triggering a broad reallocation away from U.S. Treasurys and the dollar.

‍

Analysts at Macquarie Group warned that if JGB yields are allowed to climb high enough, it could lead to a sudden rebalancing of Japanese institutional portfolios away from U.S. debt—posing a risk to Treasury and dollar holders alike.

‍

Adding to the headwinds is the seasonal trend that typically works against equities in the summer months. According to Dow Jones Market Data, since 1950 the S&P 500 has gained an average of only 1.2% during summer—compared to stronger average gains of 2.4% in spring, 2.2% in fall, and 3.1% in winter.

‍

Altogether, investors heading into the summer face a challenging landscape marked by renewed trade tensions, fiscal concerns, and global bond market volatility—all of which could amplify market instability in the weeks ahead.

‍