Do you really believe Donald Trump has come to his senses on tariffs?

Open this photo in gallery:

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Party now, pay later?

That might be the risk for the U.S. stock market, given the giddy euphoria of the past few weeks. The plunge triggered by Donald Trump’s Liberation Day, one of the strangest events in American economic history, gave way to an equally powerful rebound after the President suspended most of the wide-ranging tariffs he had imposed on trading partners and foes alike. Come Tuesday, it reached the point that all of the stock market’s losses for the year had been recovered, putting it back into positive territory.

Reflecting this, a new belief has taken hold among investors, replacing the post-Liberation Day despondence: After a brief and rash flirtation with MAGA ideologues, Mr. Trump has come to his senses and put professionals back in charge of economic policy. It’s the bond market that did it. Once it spooked Mr. Trump into submission, he started sounding more like a traditional American president and nudged aside the bomb throwers in his midst.

With the Department of Government Efficiency largely viewed as a failure, having found nowhere near the US$2-trillion in savings it promised, Elon Musk has been sidelined. Meanwhile, we’re hearing less from tariff boosters Peter Navarro and Howard Lutnick and more from Treasury Secretary Scott Bessent, whom investors regard as the adult in the MAGA room. Mr. Bessent was largely excluded from the planning for Liberation Day, but Mr. Trump has now given him the helm of much policy-making, along with the all-important talks with Beijing.

And despite Mr. Trump’s bravado, it appears that in his standoff with China, it was he who blinked first, offering a truce. Meanwhile, the President struck a trade deal with Britain and is talking with Canada, lending credence to the claim made by some members of his team that the purpose of the tariffs all along was to produce new trade agreements, not reduce trade.

Given the gloom that seized markets after Liberation Day, therefore, the relief and newfound optimism seem explicable. The sharp reduction of tariffs on China will produce new orders, which will keep store shelves stocked and provide a boost to the shipping industry. And reports from the economy have remained good, with inflation still low and employment growing. Given all this good news, we can expect the market to continue rallying.

But are investors getting ahead of themselves once more, buying the sizzle without checking the steak? Because for all the noise of the past few weeks, not much has changed. At least not yet. Tariffs, though reduced, remain in place. They will likely either raise prices and slow growth or cut profits, and neither scenario will benefit markets.

Besides, even those reduced tariffs have only been suspended, not eliminated, which means we face another cliff edge this summer. For as long as uncertainty lingers about what will follow, business investment will probably remain on hold, further slowing the economy.

And so far, the trade deals announced do little to resolve that uncertainty. None of them amount to much more than an agreement to keep talking. Several of the countries involved – China, the EU, Canada and even Britain, which is planning to draw closer to Europe – are using the pause to reorient more of their trade elsewhere, apparently betraying their own lack of faith that the America they once knew is back.

Meanwhile, the U.S.’s fiscal trajectory remains unchanged. The debt and deficit are growing by the day, driven higher largely by the rising toll of interest payments. It’s thus significant that bonds did not join the otherwise broad-based rally of the past few weeks, with rates continuing a long upward trend that started five years ago.

Finally, forward-looking reports of both business and consumer sentiment and expectations suggest we haven’t yet seen the effect of Liberation Day in economic reports – which after all are retrospective – but soon will. A few days of good headlines in the business press won’t change the way ordinary people feel about the economy.

So if not much has changed, why are the markets behaving as if everything has? As the Nobel laureate Robert Shiller has argued, narratives are vital to the behaviour of the economy. Right now, the dominant narrative within markets appears to be that all of the recent developments matter not because of what they’ll do, which is pretty modest, but of what they promise to do – that Mr. Trump will continue returning to the status quo ante of American policy, but this time with market-friendly tax cuts and deregulation to follow. That was the core belief of the original “Trump trade” that drove the market rally in the period around the election, and it’s said to be back.

But at the end of the day, everything ultimately still depends on Mr. Trump’s whims, which can turn on a dime. It’s possible that, stung by the bond outburst, he’s become a changed person. You might not want to bet on it, though.