U.S. President Donald Trump recently stepped up his tariff threats with new levies that could hit Canada, the European Union and Mexico August 1.Evan Vucci/The Associated Press
The Wisdom of Crowds is a 2004 book by James Surowiecki that examines how decisions and predictions made through the aggregation of information by large groups of people – such as, for example, the stock market – are often remarkably accurate. Extraordinary Popular Delusions and the Madness of Crowds is a 19th-century book by Charles Mackay that documents the opposite: the tendency of large groups of people – say, stock-market investors – to become collectively deluded, and to lose their shirts after persuading themselves of things that cannot be true.
The market usually gets it right. Except when it gets it very wrong.
So, which one is today’s stock market? A wise collective that is prudently ignoring U.S. President Donald Trump’s escalating tariff threats because they correctly discern that it’s a lot of noisy barking with no actual bite? Or a hallucinating mob that thinks the locomotive heading right at us is a mirage?
The Standard & Poor’s 500 Index INX-I closed at an all-time high last Thursday, then retreated slightly on Friday after Mr. Trump released another one of his tariff form letters, this one featuring a potential 35-per-cent levy on Canada. Over the weekend, Mr. Trump used the White House mimeograph machine to churn out similar letters for the European Union and Mexico, threatening 30-per-cent tariffs.
The S&P 500 responded by opening lower on Monday morning but then rising through the day, ending 0.14 per cent higher. It’s back within spitting distance of Thursday’s all-time peak. It’s also up 6.6 per cent this year. Ho-hum.
Also on Monday, the S&P/TSX Composite Index TXCX-I rose by 0.65 per cent. In the face of Mr. Trump’s Canuck-directed huffing and puffing – “governor,” “51st state,” “we don’t want cars from Canada,” etc. – it has outperformed the S&P 500 this year. It’s up 10 per cent since the start of 2025. It also keeps making all-time highs – and did so again Monday.
Britain’s FTSE 100 Index is up 8.9 per cent this year. Germany’s DAX is up 20.7 per cent. Hong Kong’s Hang Seng Index is up 23.3 per cent.
Opinion: Trump doesn’t hold all the cards on international trade
In April, after Mr. Trump unveiled his “Liberation Day” tariffs on the entire world, the market believed that the President was serious – and it had a complete meltdown. Mr. Trump responded by suspending those tariffs for 90 days, and last week he suspended them again, until August. A journalist at the Financial Times coined the acronym TACO – Trump Always Chickens Out – and the market has decided that from now on, every day is TACO Tuesday.
No matter what the President threatens, the conventional wisdom seems to be that it’s all just negotiating noise. He’s never going through with any of it – so eat up.
Here are three reasons why the market may be right, and one reason why it isn’t.
The first reason the stock market is shrugging is that it’s betting that Mr. Trump is throwing out high tariff numbers that he will then negotiate down. And that’s almost certainly correct.
The second reason is that the market assumes it will always have the power to command Mr. Trump to back down, as it did in April.
EU, South Korea seek U.S. trade deals to soften tariff blow
The third reason is that the U.S. economy is big and much of it is not trade exposed. (Canada is another story.) The Peterson Institute for International Economics recently modelled different tariff scenarios and concluded that relatively low U.S. tariffs would knock 0.5 per cent off U.S. economic growth next year, while the worst-case scenario of high and broad tariffs, heavy retaliation and a feedback loop of less investment in the United States would reduce U.S. gross domestic product in 2026 by 2.1 per cent.
But the long-run impact, though negative, would be relatively small. The analysis says that, by the early 2030s, U.S. GDP would be 0.5 per cent below the baseline in the worst-case scenario and just 0.1 per cent with milder tariffs.
Investors seem to be betting on low tariffs, low impact and all-you-can-eat TACOs.
However, what the market appears not to be considering is that Mr. Trump really, really wants tariffs. It’s true that he’s putting down extreme markers and then stepping back from them, but he’s not stepping back to zero. He is moving the ball down the field toward sustained and higher tariffs.
And it’s true that his threats are negotiating tools – but not to negotiate freer trade and fewer trade barriers. That’s the old paradigm. He’s trying to negotiate America’s trading partners into accepting less free trade and more barriers. And it’s working.
The framework for a deal with Britain, held up as a model of the best deal possible, has a baseline tariff of 10 per cent. Administration officials have repeatedly referred to 10 per cent as a new minimum that countries can expect to face, and the EU appears to have been considering accepting that to avoid higher sectoral tariffs. Then Mr. Trump last week stunned the Europeans by negotiating up, threatening a 30-per-cent tariff.
We can all wish for another three years of trade TACOs. But if Mr. Trump gets his way, they will be the amuse-bouche, not the main course.