"Trump Trade" has peaked? Wall Street is most concerned about how serious Trump is about tariffs

"The Trump Trade" frenzy is waning, and the market is beginning to focus on the risks of a Trump presidency, namely tariffs, deficits, and overvaluation.

As Trump continues to appoint new cabinet members, analysts are gaining a clearer understanding of policy details, and the recent surge in U.S. stocks has already faded. The market is currently most concerned about tariffs:

How serious will Trump be about tariffs? Tariffs are widely regarded as a source of inflation, and if tariffs are implemented as scheduled, inflation could reach its highest level since the 1930s.

Kevin Khang, head of global economic research at Vanguard Group, warns that inflation could be triggered during Trump's term, partly due to tariffs and partly because the expulsion of immigrants will tighten labor market supply, especially in industries like construction and hospitality that have long faced labor shortages. Additionally, forecasts for economic growth are becoming more cautious, but the potential impact of tariffs will depend on the actual performance of the policies.

Since the beginning of this year, buoyed by expectations of interest rate cuts from the Federal Reserve, the S&P 500 index has surged 25%. However, as more data shows a strong U.S. economy, Federal Reserve officials are publicly questioning whether further rate cuts are necessary. Derivatives traders are currently pricing in several more rate cuts by 2025; if these cuts do not materialize, U.S. stocks could decline.

In addition to tariff concerns, overvaluation is also unsettling investors.

Goldman Sachs expects the S&P 500 index to rise 10% next year, primarily due to strong earnings growth. However, Goldman Sachs equity strategist David Kostin also warns that changes in immigration policy, tariffs, and fiscal policy could lead to rising inflation.

The firm holds a pessimistic view on the long-term outlook for U.S. stocks, predicting an annualized return of only 3% for the S&P 500 index over the next decade, mainly because the stock market appears expensive by many metrics. To maintain extraordinary returns, earnings need to grow rapidly or valuations need to reach new heights. Goldman Sachs states that the cyclically adjusted price-to-earnings ratio for the S&P 500 is currently at the 97th percentile since 1930