For markets, Trump’s tariff threats are quantitative easing in reverse

Tariff talk is playing a role in the S&P 500’s near 10% decline from all-time highs, but probably not in the way you might think.

In fact, what the seemingly incessant barrage of tariff threats (and walk-backs) is doing to contribute to this retreat appears analogous to claims of how the Federal Reserve’s quantitative easing drives upside in stocks — only in reverse.

Arguments that bond-buying programs by the Federal Reserve are a crucial linchpin for the direction of stock market range from the rudimentary and mechanically flawed (“pumping money into the stock market”) to the more advanced but difficult to quantify (portfolio rebalancing channel, which seems to work best in helping to tighten credit spreads).

Zooming out, the stock market has gone up while the Federal Reserve’s balance sheet is growing. The stock market has also gone up with the Federal Reserve’s balance sheet contracting. There is no magic cheat code here.

What quantitative easing accomplishes is that it offers a signal to the market that monetary policy is locking in to a prolonged period of providing support for the economy and financial system. Simply, if the Federal Reserve is buying bonds, it’s a helluva long way from raising rates.

To compare this to tariffs, every minute US President Donald Trump spends musing about tariffs is a minute he isn’t talking about deregulation or tax cuts. It’s a revealed preference on where his priorities lie. It’s a signal that policy is not pointed in a pro-growth direction.

And he is talking about tariffs. A lot.

Tariffs are a signal of what has been said explicitly by Treasury Secretary Scott Bessent: in Trump 2.0, the stock market is not the administration’s report card (for now, at least). And the near-term performance of the economy might not be, either.

The trend for nominal growth is lower, and the Trump administration is signaling — through tariff talks, DOGE, and more — that they should not be expected to serve as a catalyst for any inflection higher in activity. If you’re a US stock bull living in a world in which the premium profit growth generated by megacap tech companies and AI-linked names is also off the boil, tariff chatterings are not the tape bombs you’re looking for.

This choice of priorities is both disturbing and surprising to a market where measures of consumer confidence jolted higher in the wake of the election, in part due to memories of Trump 1.0 policy sequencing: tax cuts first, prosecute a trade war against China second.

There should be no doubt in how this sell-off started: a breakdown in momentum stocks catalyzed by Walmart’s underwhelming guidance that kneecapped an AI trade which had enjoyed great success and become richly priced.

Momentum stocks fell 5% and Technology Select Sector SPDR was down 7%, while Financial Select Sector SPDR Fund, which is much more sensitive to perceived ebbs and flows in US economic activity, traded flat. AI infrastructure names like Arista Networks were down 10% while Bank of America was up. These are not things you would expect to see if fears about economic growth were the proximate cause of the market’s initial decline — they weren’t.

That any growth scare means high-flying stocks get dumped the most is far from a hard-and-fast rule, and not borne out by most market corrections or bear markets of note over the past decade (exception: 2022). In the 2015-16 sell-off, which occurred amid a US industrial recession due to the shale bust coupled with fears of a hard landing in China, momentum and tech outperformed and financials underperformed. Even in the Q4 2018 tumble, which bore many more hallmarks of a messy long-short deleveraging, cyclical stocks still did worse than momentum. Same thing through the Covid-induced market crash.

In March, we’ve seen an evolution in the sell-off, with financials tumbling (though still not doing as badly as momentum) and a noteworthy widening in credit spreads. Growth fears have clearly earned their place as the best supporting actor in this horror flick, and may well ascend to a leading role.

What role are tariffs playing in exacerbating worries about an economic downturn? Well, there’s certainly something there, with a basket of stocks compiled by Goldman Sachs judged to be most sensitive to levies underperforming a group deemed tariff-immune by a little less than 2% since the S&P 500’s record close on February 19. 

But a look at the performance of General Motors and Ford during this stretch should raise questions about how potent of a catalyst this is. One of the first rules of risk management is that if you don’t know what’s going on, you reduce risk. There is no reason why those automakers, perhaps the companies that would be most disrupted by wide-ranging tariffs against Canada and Mexico, should be immune from this dynamic in a world where concerns about North American tariffs are purportedly escalating. In fact, both are… up during the market’s decline.

I would suggest this means anyone deeming this a tariff-centric sell-off is in the unenviable position of having to also argue that it was efficiently priced in, to GM and Ford at least, before the market’s retreat from all-time highs even began.