Investors, once emboldened by the so-called ‘Trump trades’ - long U.S. dollar, short U.S. government bonds, and overweight anything American - are now struggling to identify the next structural theme. The big uncertainty: tariffs.
In the immediate aftermath of Trump’s victory, these trades paid off. The dollar surged nearly 10 percent, the U.S. Treasury curve aggressively, and equities hit record highs. However, as policy volatility intensifies and valuations stretch, momentum is fading.
“We are currently seeing increasing uncertainty in the market, as it is not entirely clear in which direction the Trump administration is heading,” said Thomas Altmann, head of portfolio management at QC Partners in Frankfurt.
Trump’s approach to tariffs: imposing, retracting, and threatening new levies, has left markets in limbo.
“So far, tariffs have been used as a negotiation tool rather than a consistent policy instrument. As long as there is no clear political direction, markets will struggle to find a definitive trend,” he told Investment Officer.
Analysts struggle to predict impact
Predicting the impact at a company level is difficult without clarity on which inputs will be affected, when tariffs will hit, how steep they’ll be, and how long they’ll last. Therefore investors are still underpricing tariff risks, said Ronald Temple, chief market strategist at Lazard.
“Analysts, focused on modeling future cash flows, struggle to quantify these unknowns,” he said. “Many are waiting for actual tariff implementation before adjusting share prices. They leave room for potential market shocks as key deadlines approach, including March 4 for Canada’s and Mexico’s 30-day extension, steel and aluminum tariffs on March 12 and reciprocal measures on April 1.”
This uncertainty has prompted a recalibration in investment strategy. Neil Mehta, macro portfolio manager at RBC BlueBay Asset Management, recommends focusing on disciplined asset allocation rather than chasing volatile trends.
“The sheer level of uncertainty around trade policy makes it difficult to integrate into investment decision-making. Ex-US, geopolitical shifts further complicate macro investing,” Mehta said, advocating cautiousness.
That uncertainty is now forcing investors to reassess the once-successful Trump trades. Investors are questioning whether the original thesis behind them still holds.
Dollar strength and its limits
The dollar saw an initial boost under Donald Trump’s economic agenda, driven by tariffs, tax cuts, and deregulation. In the weeks following his election, the greenback gained about 1.5 percent against major currencies, with the Dollar Index (DXY) surging nearly 4 percent since Election Day. However, momentum has waned, and the currency has retreated since mid-January.
A stronger dollar presents challenges. It erodes U.S. export competitiveness, while rising interest rates and inflation can neutralize the benefits of increased purchasing power. After peaking in late January, the dollar index has been slipping, underscoring the market’s struggle to price in unpredictable policy shifts.
“The challenge for traders is that, despite some fatigue in the Trump trades, there’s no way to predict if tomorrow will bring a fresh wave of tariffs,” said Chris Turner, global head of markets at ING. “A new round of tariffs could easily derail expectations of a meaningful dollar correction.”
Reversal in the bond market
Ahead of the election, bond traders had a straightforward bet: a Trump victory meant shorting Treasuries in anticipation of higher yields. This strategy initially paid off, with U.S. Treasury yields climbing from 4.3 percent in early November to 4.8 percent by January, driven by expectations of aggressive fiscal expansion and higher borrowing.
The US Treasury yield curve has steepened
One estimate projected that Trump’s policies could add 7.5 trillion dollars to U.S. Treasury debt issuance over the next decade, more than double the estimated increase under Kamala Harris’s proposed policies.
Yet, since the peak in January, bond yields have drifted lower to around 4.54 percent, complicating the outlook for investors who shorted Treasuries. Inflation concerns persist, but markets are now weighing the growth-dampening effects of tariffs and restrictive immigration policies.
“The fall in yields is partly due to expectations that the government may try to reduce spending to balance tax cuts,” said Guy Stear, head of developed markets research at Amundi Investment Institute.
“Additionally, bank deregulation has increased the demand for Treasuries. It has also become clear that the Treasury Secretary really does care about the level of US 10Y yields.”
Equities
U.S. equities rallied sharply following Trump’s victory, with the Dow Jones Industrial Average and S&P 500 posting strong gains. The Russell 2000 surged 10.8 percent, fueled by expectations that smaller firms would benefit from corporate tax cuts. Energy and financial stocks soared on deregulation hopes.
Post-inauguration, US stocks have been flat, or declining
However, much of these moves were priced in early, and by 2025, the rally has lost steam. The S&P 500 has edged up 4.5 percent this year, with the tech behemoths showing mixed performance. While Meta has surged 25.8 percent, Tesla, Microsoft, and Alphabet have lagged.
Jacob Vijverberg, head of asset allocation at Aegon AM, notes that lofty tech valuations leave little room for upside. “Even high earnings growth is proving insufficient to push shares higher,” he said.
Even Bitcoin, often viewed as the quintessential Trump trade, has seen renewed momentum since the inauguration, following an election rally of more than 60 percent. The cryptocurrency, long favored by those skeptical of traditional financial institutions and government intervention, is down 7 percent since the inauguration.
Europe’s resurgence
Instead, momentum appears to be shifting towards Europe, where the Stoxx 600 has been outperforming the S&P 500 significantly. While European markets have long been seen as structurally disadvantaged—plagued by geopolitical tensions, high energy prices, and a lack of innovation—low valuations have fueled a strong recovery.
“Recent strong returns are more a revaluation of understated expectations than a growth-driven rally. After all, corporate profits in Europe are barely growing,” said Vijverberg.
This shift in investor sentiment suggests that Europe’s recent market gains are being driven more by a reassessment of valuations than by underlying economic strength.