Piper: Investors may be over tariffs, but tariffs may not be over investors

The market is exhibiting a muted reaction to recent Trump administration tariff threats and deadline extensions, including new warnings to Japan, South Korea, and potentially the EU, with investors seemingly believing the worst of trade tensions is past. However, Capital Economics and Piper Sandler analysts warn against this complacency, asserting that Trump's aggressive tariff agenda is far from over, with little evidence of rollbacks, suggesting investors may be underestimating continued trade-related risks despite the August 1 deadline for new levies.

Analysis

A notable divergence has emerged between market sentiment and analyst warnings regarding U.S. trade policy. Despite new tariff threats against Japan and South Korea and a stated August 1 deadline for new levies, markets have shown a muted response, with Wall Street trading mixed and option-implied volatilities hovering near their lowest levels since April. According to Piper Sandler, this reflects an investor consensus that the most severe phase of the trade conflict is over and that existing tariffs are manageable. However, this view is directly contradicted by guidance from both Capital Economics and Piper Sandler, who argue that investors are underestimating the persistence of the administration's tariff agenda. They cite "scant evidence" of tariff rollbacks and contend that the impact of existing hikes on steel, aluminum, and autos is "too substantial to be digested" without negative economic effects. The core of the issue is a complacent market pricing in a resolution while expert analysis suggests that significant, market-moving trade risk remains a high probability.

Key Decisions for Investors

• Given the disconnect between low market volatility and ongoing tariff threats, investors should re-evaluate portfolio exposure to trade-sensitive sectors ahead of the August 1 deadline.
• The current low option-implied volatility may offer a cost-effective window to hedge against a potential market shock triggered by an escalation in trade disputes.
• Monitor for shifts in market sentiment or more definitive policy statements, as the current calm could quickly reverse if the risks highlighted by analysts begin to be priced in by the broader market.