Bloomberg via Getty Images

“Two days after I celebrated him taking office in 2025, he cut my position within the federal government.”

“A leader who divides the country that deeply just isn’t capable of creating positive, lasting change.”

Brandon Bell via Getty Images

“What kind of president sells bibles, gold shoes and a $100,000 watch?”

“I can not, in good conscience, cast a vote for someone who infringes on the constitution.”

Amir Levy via Getty Images

“The final straw was the Uvalde, TX, school shooting.”

“Trump and MAGA used their self-righteous anger and power as a shield to deflect accountability.”

“My vote went ultimately to what feels like a South African chainsaw artist.”

CHRIS JACKSON via Getty Images

“I supported Trump all along during his first term up until the pandemic.”

“I became increasingly disillusioned with Trump’s rhetoric and policies, particularly his lack of regard for basic human rights.”

On Sunday, President Donald Trump sought to calm nerves in a post on Truth Social, following his announcement on Friday that he will impose an additional 100% tariff on China and limit U.S. exports of software. 

“Don’t worry about China, it will all be fine!” he wrote. “Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!!”

Meanwhile, Vice President JD Vance told Fox News’s Sunday Morning Futures that the U.S. is willing to be reasonable if China is too, though he insisted Trump has the upper hand with “far more cards” than Beijing holds.

The shift in tone contrasts with Trump’s fiery rhetoric on Friday as he lashed out at China for its new export controls on rare earths, which are critical inputs across a range of industries.

“Market participants appear to be leaning into the TACO trade once more, fueled not only by what we’ve seen in the recent past, but also by conciliatory remarks over the weekend from both President Trump and Vice President Vance, suggesting that Friday’s announcement of additional 100% tariffs on Chinese imports are likely to be little more than a negotiating tactic,” Michael Brown, senior research strategist at Pepperstone, said in a note on Sunday.

Futures tied to the Dow Jones Industrial Average surged 382 points, or 0.84%. S&P 500 futures were up 1.27%, and Nasdaq futures jumped 1.79%.

The yield on the 10-year Treasury tumbled 8.9 basis points to 4.059%. The U.S. dollar was up 0.04% against the euro and up 0.48% against the yen. Gold climbed 1.43% to a new high of $4,057.50 per ounce. U.S. oil futures rose 1.29% to $59.66 a barrel, and Brent crude gained 1.32% to $63.56.

Trump had previously imposed 145% tariffs on China, then put them on hold to allow negotiations to play out. A similar pattern played out with other trade partners like the European Union, causing Wall Street to dismiss maximalist threats with the TACO (Trump always chickens out) trade.

Brown said Trump’s new China tariff, which would go into effect Nov. 1 and bring the overall level to 130%, appears to be another example of his “escalate to de-escalate” strategy.

“Assuming that this is another ‘TACO’ situation, and some clarity on that front is obtained before too long, then this is likely to prove another dip in equities that should be viewed as a buying opportunity, with the path of least resistance continuing to lead higher, if in somewhat choppy fashion,” he added.

At the same time, the Federal Reserve’s shift back to rate cuts amid still-solid economic growth should continue to boost to the dollar, which will likely shrug off tariff threats, Brown predicted.

Similarly, market veteran Ed Yardeni, president of Yardeni Research, also sees the U.S. and China pulling back from the precipice.

“If neither side were to blink, the US and Chinese economies would lead the global economy into a deep recession, if not a depression,” he wrote in a note on Sunday. “But we expect that both sides will blink very soon given the extremely adverse consequences of a trade war between the world’s two biggest economies.”

For its part, Beijing remained defiant, with the commerce ministry saying Sunday that China doesn’t want a tariff war but is also not afraid of one. It also said the export controls are not a ban on rare earth shipments but are a sovereign right.

But China’s new rare earth export policy ups the ante well beyond another tit-for-tat exchange in the trade war against the U.S.

Dean Ball, who served as a senior advisor in the White House Office of Science and Technology Policy earlier this year, wrote on X on Saturday that the policy gives Beijing the power to “forbid any country on Earth from participating in the modern economy.”

Dali Yang, a political science professor at the University of Chicago, sounded a similar alarm in a post on Sunday, saying the move marks a decisive moment that reveals what a China-led order might look like.

Looking beyond rare earths, it’s one that leverages control over strategic materials and technologies to prop up global influence.

“China is effectively saying: ‘We control the arteries of high-tech civilization.’ The rest of the world now sees that message clearly—and is scrambling to build new circulatory systems,” Yang wrote.

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“We have trillions of dollars coming into our country,” Trump said Wednesday. “If we didn’t have tariffs, we would be a very poor nation and we would be taken advantage of by every other nation in the world, friend and foe.”

But two courts have now ruled that his biggest and boldest import taxes are illegal. If the Supreme Court agrees and strikes them down for good, the federal government could have to pay back many of the taxes it’s already collected from companies that import foreign products into the United States.

“We’re talking about hundreds of billions of dollars potentially in refunds affecting thousands and thousands of importers,” said trade lawyer Luis Arandia, a partner with the law firm of Barnes & Thornburg. “Unwinding all that will be the largest administrative effort in U.S. government history.’’

Ordinary Americans, who’ve had to pay higher prices on some products because of the tariffs, are unlikely to share in the windfall. Any refunds would go instead to the companies that paid the levies in the first place.

The refunds would also reverse the flow of tariff revenue the president has counted on to help pay for the massive tax-cut bill he signed July 4 and would threaten, he warns, to “literally destroy the United States of America.’’

At issue are revenues raised from tariffs Trump imposed this year by invoking the 1977 International Emergency Economic Powers Act (IEEPA). One set of IEEPA tariffs targeted almost every country on earth after he declared that the United States’ massive and persistent trade deficits amounted to a national emergency. Another was aimed at Canada, China and Mexico and was meant to counter the illegal flow of drugs and immigrants across U.S. borders.

But a specialized federal trade court in New York ruled in May that the president overstepped his authority by ignoring Congress and imposing the IEEPA tariffs. The U.S. Court of Appeals for the Federal Circuit last week largely upheld the trade court’s decision, though it also ordered the lower court to re-consider whether there was any legal fix short of striking down the tariffs completely.

The appellate judges also paused their own ruling until mid-October to give the administration time to appeal to the Supreme Court – something that it did on Wednesday. Solicitor General D. John Sauer asked the justices to take up the case and hear arguments in early November.

If the high court strikes down the IEEPA tariffs, importers could be entitled to refunds. The U.S. Customs and Border Protection agency reports that it had collected more than $72 billion in IEEPA tariffs through Aug. 24.

For importers, Ted Murphy, co-leader of the international trade practice at the Sidley Austin law firm, said: “It’s a question of what you’re going to have to do to get the refund.

“And the options are everything from nothing — the government may just automatically refund it; I don’t think this is likely, but that’s one option. There could be an administrative process, so you have to go to U.S. Customs and Border Protection and apply for a refund of your IEEPA tariffs. Or you could have to file your own court case.’’

There’s a precedent for courts setting up a system to give companies their money back in trade cases. In the 1990s, the courts struck down as unconstitutional a harbor maintenance fee on exports and set up a system for exporters to apply to get their money back.

“Companies got refunds,’’ Murphy said. One hitch: In that case, the government did not have to pay interest on the tax it collected and had to pay back. It’s unclear whether the government would have to pay interest on any IEEPA tariff refunds.

The Trump administration might balk at paying back the tariffs it’s collected. Trump has already said he doesn’t want to pay the money back, posting on his social media site in August that doing so “would be 1929 all over again, a GREAT DEPRESSION!”

“I would anticipate that if the administration did lose, they would turn around and start arguing why it would be impossible to give refunds to everybody,” said Brent Skorup, legal fellow at the libertarian Cato Institute. “I think there will a lot of litigation about the nature of refunds and who’s entitled one. And I expect the administration will raise all sorts of objections.”

To make sure they can successfully claim refunds, said Barnes & Thornberg partner Clinton Yu, “importers really need to have their records in order.’’

Adding to the uncertainty is the chaotic way that Trump has rolled out his tariffs — announcing and then delaying or altering them, sometimes conjuring up new ones. Occasionally, the administration has decided that importers that have already paid one of his tariffs don’t have to pay a different one.

Tariff are paid by importers, who often then try to pass the cost on to their customers through higher prices. But consumers would not have recourse to ask for refunds for the higher prices they had to pay.

“It’s the importer of record that is legally liable for paying tariffs and duties,’’ Arandia said. “They would be the only one to have standing to even get that money back.’’

____

AP Writers Lindsay Whitehurst and Josh Boak contributed to this story.

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On Friday night, the U.S. Court of Appeals for the Federal Circuit ruled that most of Trump’s so-called reciprocal tariffs on global trading partners are illegal.

That upheld an earlier ruling by the Court of International Trade, which found that the tariffs’ legal basis under the International Emergency Economic Powers Act (IEEPA) wasn’t valid, saying that the administration’s argument for the tariffs didn’t constitute an emergency.

“Both the Trafficking Tariffs and the Reciprocal Tariffs are unbounded in scope, amount, and duration,” the majority wrote. “These tariffs apply to nearly all articles imported into the United States (and, in the case of the Reciprocal Tariffs, apply to almost all countries), impose high rates which are ever-changing and exceed those set out in the [U.S. tariff system], and are not limited in duration.”

The Trump administration is appealing the decision to the Supreme Court, and Friday’s ruling is on hold until mid-October to give the high court a chance to consider the case.

On Fox News’s Sunday Morning Futures, Navarro called the appeals court’s ruling “weaponized partisan injustice” and said the dissenting opinion in favor of the tariffs should give the White House a strong argument before the Supreme Court.

The judges who sided with the administration said IEEPA allows “broad emergency authority in this foreign-affairs realm, which unsurprisingly extends beyond authorities available under non-emergency laws.” 

Navarro also said the trade deficit does indeed constitute an emergency because it is “absolutely devastating to this country.” And he pushed back against the appeals court’s characterization of the tariffs as unlimited in duration.

“Hey memo to the court: we never said they were permanent,” he said.

If the flow of illegal drugs from China, Mexico and Canada stop, the tariffs will go away, Navarro added, likewise if the trade deficit shrinks to nothing.

In April, Trump was asked about comments from administration officials who said tariffs could be negotiated and that they were permanent.

“They can both be true,” he replied. “There could be permanent tariffs, and there could also be negotiations, because there are things that we need beyond tariffs.”

In May, Trump also said auto tariffs are permanent, but those duties weren’t affected by Friday’s court ruling as they were invoked under a different law.

He has also touted the long-term benefits of his tariffs, recently pointing to the CBO’s 10-year projection that tariffs will reduce the deficit by $4 trillion and that they will bring in enough revenue to lower the U.S. debt, which tops $37 trillion.

“The purpose of what I’m doing is primarily to pay down debt, which will happen in very large quantity — but I think there’s also a possibility that we’re taking in so much money that we may very well make a dividend to the people of America,” Trump said earlier this month.

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One theory is that they are trading as if one of two conditions will turn out to be true:

• The new E.U. deal is, like its Japanese counterpart, mostly composed of stuff that will never happen or was happening anyway, and therefore changes little.
• The U.S. Supreme Court will rule that Trump has no authority to negotiate tariffs on his own under the International Emergency Economic Powers Act, and that all his deals will be declared null, resetting tariff levels nearer to zero.

That would explain why, this morning, Goldman Sachs moved its estimate of E.U. GDP upward by 0.1%, following the deal, according to a note from Sahar Islam and Ayushi Mishra.

Analysts are hinting this morning that E.U. officials appear to have pulled the wool over Trump’s eyes in the negotiations. The deal includes $750 billion in “strategic purchases,” $600 billion of private investment, and “vast quantities” of military equipment purchases. But there is near unanimity on Wall Street that the private investment was going to happen anyway in the normal course of business. 

“The $600bn represents existing investment plans, not new investment,” Mark Wall and his team at Deutsche Bank wrote this morning. 

“Pie in the sky”

And the Financial Times reported this morning that Europe’s “promise” to buy $750 billion of energy from the U.S. cannot actually be fulfilled because the European fuel market is controlled by private companies, not their governments. “Even if Europe did want to increase its imports, I don’t know the mechanism by which the EU goes to these companies and tells them to buy more US energy,” Matt Smith, an exec at the energy consultancy Kpler, told the FT. He called it “pie in the sky.”

The E.U. government doesn’t have the power to compel private companies to buy American oil, the price of energy is coming down, and the long-term trend in Europe is to phase out fossil fuels in favor of renewables. “European gas demand is soft and energy prices are falling. In any case, it is private companies not states that contract for energy imports,” Bill Farren-Price, head of gas research at the Oxford Institute for Energy Studies, told the FT. “Like it or not, in Europe the windmills are winning.”

The military purchases are unsurprising given that Russia is waging war on its eastern flank. Europe needs all the weapons it can get. NATO will be happy to buy from the U.S.

VOS Selections vs Trump

And then, waiting in the wings, is the biggest potential upside surprise to global stocks of them all: VOS Selections vs Trump. This case was brought by a group of small American businesses who are angry that their bills are going up because of the tariffs. They argue that Trump’s assertion of a national emergency under the International Emergency Economic Powers Act of 1977 is not valid for him to make trade deals without Congressional approval. (Congress is the usual body that approves trade deals.) An appeals hearing is set for July 31 and it is likely that, in turn, the case will go to the U.S. Supreme Court in Washington, D.C.

“If the IEEPA is deemed inadmissable, the status of the trade deals is also unclear,” JPMorgan’s Jahangir Aziz and Bruce Kasman reminded clients this morning.

The high court is packed with Trump’s own picks, of course, so he can expect a sympathetic hearing. It would nonetheless be a huge leap for the justices to agree that routine trade deficits constitute a national emergency. 

If they eventually declare the tariffs illegal, expect stocks to leap. 

Here’s a snapshot of the action prior to the opening bell in New York:

• S&P 500 futures were up 0.28% this morning, premarket, after the index closed up 0.018% on monday, hitting another new all-time high at 6,389.77.
• STOXX Europe 600 was up 0.93% in early trading. 
• The U.K.’s FTSE 100 was up 0.73% in early trading. 
• Japan’s Nikkei 225 was down 1.10%. 
• China’s CSI 300 Index was up 0.39%. 
• The South Korea KOSPI was up 0.66%. 
• India’s Nifty 50 was up 0.50%. 
• Bitcoin is holding above $118K.

When examined with a wide lens, no asset class has come particularly close to matching or surpassing the annualized return of stocks. But generating life-changing long-term returns in the stock market often means enduring periods of outsized volatility.

Since December, the iconic Dow Jones Industrial Average (^DJI 0.77%), benchmark S&P 500 (^GSPC 0.83%), and innovation-propelled Nasdaq Composite (^IXIC 1.02%) have been all over the map. After closing at respective record highs between December and mid-February, the Dow and S&P 500 dipped into correction territory by early April. As for the Nasdaq Composite, it entered its first bear market in three years.

Just three months later, the S&P 500 and Nasdaq Composite have achieved fresh record closing highs, with the Dow nearing an all-time high of its own.

Outsized volatility of this magnitude is typically the result of fear and uncertainty from the investing community. While it’d be easy to suggest President Donald Trump’s tariff and trade policy is Wall Street’s biggest concern, there’s actually something much more nefarious (and important) that threatens to drag down the Dow, S&P 500, and Nasdaq Composite.

President Trump’s 90-day reciprocal tariff pause is almost over

There’s no question that investors have been on edge since Trump introduced his tariff and trade policy after the close of trading on April 2. The two days following the unveiling of his tariff policy led to the S&P 500’s fifth-largest two-day percentage decline in 75 years!

Trump’s initial announcement introduced a sweeping 10% global tariff and implemented higher “reciprocal tariff” rates on dozens of countries that have historically sported adverse trade imbalances with America.

On April 9, President Trump announced a 90-day pause on reciprocal tariffs (that went into effect on April 10) for all countries except China, which allowed time for trade negotiations to take place. While some trade deals have been signed or agreed upon over the last three months, this 90-day pause is set to end on July 9, which could open up a new can of worms for the U.S. economy.

One of the issues with tariffs is the possibility of worsening trade relations with allies. Even if key trade partners are willing to accept additional tariffs, there’s the risk of anti-American sentiment in foreign countries resulting in consumers buying fewer American-made goods.

Another worry with tariffs is the potential for the domestic rate of inflation to pick up. Trump’s tariff and trade policy doesn’t do a very good job of differentiating between input and output tariffs. Whereas the latter are placed on finished products being imported into the country, input tariffs are affixed to goods used to manufacture/complete products domestically. Input tariffs threaten to reignite the U.S. inflation rate.

Further, based on a Liberty Street Economics analysis (“Do Import Tariffs Protect U.S. Firms?”) by four New York Fed economists, public companies with direct exposure to Trump’s China tariffs in 2018-2019 had worse future outcomes from 2019 to 2021 than companies with no exposure. On average, sales, profits, employment, and productivity all fell for American companies exposed to the U.S.-China trade war during Trump’s first term.

While Donald Trump’s tariffs offer a valid reason for investors to be concerned about the stock market, there’s a considerably bigger problem at hand that most investors appear to be overlooking.

Is Wall Street’s rally built on a house of cards?

The stock market entered 2025 at one of its priciest valuations in history, based on the S&P 500’s Shiller price-to-earnings (P/E) ratio. In December, the Shiller P/E hit 38.89, which is the third-highest multiple during a continuous bull market when back-tested to January 1871.

The five previous instances when the Shiller P/E ratio surpassed 30 and held that multiple for at least two months were eventually (keyword!) followed by declines in the Dow, S&P 500, and/or Nasdaq Composite ranging from 20% to 89%. In other words, the stock market has a poor track record of sustaining extended valuations.

The one factor that can support premium valuations is strong growth in corporate earnings. If the publicly traded companies responsible for driving the stock market higher are delivering rock-solid earnings-per-share (EPS) growth, it may be possible to maintain aggressive valuations.

There’s just one problem: The earnings quality of these influential businesses is worse than you probably realize.

Ideally, a company’s operations should do the talking. But if you dig into the earnings reports of America’s most influential businesses, you’ll discover a number of ways profits have been (legally) bolstered by non-innovative or unsustainable methods.

For example, I regularly harp on Apple (AAPL 0.52%) as a company that’s pulled one heck of a legal smoke-and-mirrors trick on its investors. Don’t get me wrong, Apple has historically been at the leading edge of the innovative curve, and its iPhone has been the top-selling smartphone in the U.S. since introducing a 5G-capable version in the fourth quarter of 2020.

But Apple’s not-so-subtle secret to success has been its world-leading share repurchase program. Since initiating a buyback program in 2013, it has spent $775 billion to retire more than 43% of its outstanding shares.

Between fiscal 2022 and fiscal 2024 (Apple’s fiscal year ends in late September), Apple’s net income declined from $99.8 billion to $93.7 billion. However, thanks to buybacks and a lower outstanding share count, its EPS fell only from $6.11 to $6.08. It has been able to completely mask a greater than $6 billion decline in net income through buybacks and has seen its share price climb by 53% over the trailing-three-year period, as of July 2, 2025.

But this isn’t just a buyback problem masking a lack of growth. We’re also witnessing growth stocks rely on unsustainable forms of income as a significant portion of their profits.

Palantir Technologies (PLTR 1.62%) has arguably surpassed Nvidia as Wall Street’s most-revered artificial intelligence (AI) stock. Palantir’s sustainable moat, its multiyear government contracts via Gotham and predictable enterprise subscriptions from Foundry, and its 25% to 35% annual sales growth all point to its EPS growth being driven by its operations.

However, Palantir has consistently relied on interest income earned from its large cash pile to buoy its net income. During the March-ended quarter, 23% of Palantir’s $217.7 million in net income was traced back to interest income earned on its cash. This is a notable percentage of its net income coming from an unsustainable and non-innovative source — and it’s particularly egregious, given that Palantir shares are changing hands at 106 times trailing-12-month sales!

Electric-vehicle (EV) maker Tesla (TSLA 0.04%) is another perfect example of poor earnings quality in action. Ideally, Tesla’s first-mover EV advantages, along with its ongoing shift to diversify its operations into energy generation and storage, are what bolster its bottom line.

Yet, during the March-ended quarter, Tesla’s $589 million in pre-tax income derived entirely from unsustainable sources. It generated $595 million from regulatory tax credits sold to other automakers (which it receives for free from governments), as well as $309 million in net interest income, after interest expenses. If not for tax credits and net interest income, Tesla would have reported a $315 million pre-tax loss in the first quarter.

Wall Street is littered with stories similar to this, where companies have relied on unsustainable or non-innovative channels to mask a true lack of growth. With the Shiller P/E pushing to one of its priciest valuations in 154 years, poor earnings quality for America’s most influential businesses is what should really worry investors.