ClockWise: Investor sentiment swings back to complacent territory despite negative tariff headlines

Following the end of the 90-day pause on Liberation Day reciprocal tariffs, we’ve seen a series of trade ‘deals’, letters, and social media threats.

Based on announced tariff rates, calculations by Yale Budget Lab suggest current US tariff rates are now creeping back towards the Liberation Day levels which triggered recession fears and a sharp market slump (Chart 1).

It may seem rather surprising then that investors are so far unfazed, and that equity market volatility has remained at surprisingly low levels, with the latest proposed tariffs perhaps seen by the investor community more as negotiation tactics ahead of the 1 August deadline.

Our measure of investor sentiment fell into severe panic in April —levels comparable to Covid and the Great Financial Crisis — but has now swung to euphoric levels last seen in December 2024 when ‘US exceptionalism’ was the dominant theme (Chart 2). This may prove complacent but periods of exuberant sentiment in the past have often not been followed by market corrections – rallies can persist for extended periods, particularly coming out of recession or recession scares.

Rallies can persist for extended periods, particularly coming out of recession or recession scares.

US equities have rebounded a long way since Liberation Day on easing recession fears and resilient earnings. This makes sense to us. While the US economy may appear less exceptional by year-end, in a slower-growth environment that avoids recession but may see margins squeezed, investors typically favour firms with strong earnings potential. Many of these are US-listed AI beneficiaries, which may continue to support sentiment in the near term.

However, US equities still lag UK and European markets by over 10% on a year-to-date basis (currency-adjusted), largely due to a weaker dollar—pressured by chaotic US policy, threats to Fed independence and fiscal sustainability concerns.

Looking ahead, we still don’t know at what tariff levels will ultimately settle, or the full impact of these tariffs and the surrounding uncertainty on global growth and inflation. These effects will become clearer over time. In such an evolving environment, we believe that an investment approach that invests in a broad range of assets to improve resilience to unexpected shocks and that adapts to changing macroeconomic conditions and corporate fundamentals will be key.

Chart 1: Yale Budget Lab calculations: Announced effective tax rate (as of July 14  2025)

Source: The Budget Lab at Yale

Chart 1: Yale Budget Lab calculations: Announced effective tax rate (as of July 14  2025)

Source: LSEG DataStream, RLAM

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