Tariff countdown as the market’s TACO stand get's tested

The TACO stand

US equity futures tiptoed into Friday with their rally shoes still on, but the laces were starting to loosen. S&P futures slipped 0.6%—a mild stumble, not a tumble—as traders glance nervously at the clock ticking toward July 9. That’s when Trump’s tariff pause expires, and judging by his latest rhetoric, the gloves may finally come off. Talk of slapping 70% levies on trading partners isn’t just sabre-rattling—it’s a shot across the bow as deal negotiations drag into the eleventh hour.

The S&P 500 remains just a breath away from its all-time highs, suggesting the market still thinks this is a dance, not a duel. Investors are leaning hard into the well-worn “TACO” theory—Trump always chickens out—expecting last-minute handshakes and headline hedges instead of hard-hitting tariffs. But as anyone who's traded Trump tape knows, that comfort can vanish faster than liquidity on a July afternoon.

European stocks gave back some shine, while gold inched higher as investors tucked a little safety under the mattress. The dollar barely budged, dulled by the July 4 lull and a better-than-expected jobs report that firmed the soft middle of the curve. And yet, for all the signs of risk resilience, there’s a quiet hum of discomfort—like traders know they’ve been to this rodeo before.

We’ve rallied hard off the April lows, when Liberation Day sparked a risk reset. But unlike then, the market today is long good news—rate-cut wagers, and fiscal fireworks from Trump’s “Big, Beautiful Bill.” That makes the setup more fragile. If tariffs come in hotter than priced, it won’t take a sledgehammer to knock sentiment—just a higher-than-expected tariff regime to crack in the vol surface.

On the flip side, if Washington blinks again and we get a mild, managed escalation—or a face-saving framework with enough ambiguity to kick the can—then the dollar likely leaks lower, yields soften, and risk can resume its climb. But it’s a narrow runway either way.

This tape isn’t priced for a full-blown punch-up. It’s priced for brinkmanship without bruises. That makes next week’s newsflow less of a binary trade and more of a volatility trap.

This time is different, again

Equity markets spent the shortened week whistling past the tariff graveyard, rallying on a mix of stable data and fiscal pyrotechnics. The S&P 500 climbed 1.7%, tagging a fresh record high, as banks, materials, and big tech led the charge. For all the geopolitical smoke and tariff tension, US stocks are quietly up 7% year-to-date and 13% from a year ago—another reminder that the market has a knack for climbing walls of worry when the footing feels just good enough.

The June payrolls report landed like a feather—neither hawkish nor dovish, just soft enough to keep the Fed in wait-and-see mode. The 147k headline was solid, but private-sector hiring only managed half that, and participation edged lower. Wage growth and hours worked weren’t exactly screaming overheating either. It was, in market terms, a nothingburger with a side of mixed fries—unlikely to push the Fed toward action this month, but also not weak enough to scream for immediate easing.

Meanwhile, macro indicators like PMIs stayed in the “not great, not terrible” zone, while auto sales dipped again, hinting that the consumer may be less bulletproof than the market implies.

Then came the One Big Beautiful Bill Act, a fiscal Molotov cocktail wrapped in a star-spangled bow. It won’t move the 2025 needle much, but by 2026 the tax cuts and defense spend could provide a modest tailwind to growth—albeit with a big, fat, interest-bearing IOU attached.

In short, this week’s action fits the summer tape: low conviction, low vol, and a market that’s leaning into resilience. Rate cut hopes haven’t evaporated, but they’ve drifted a bit further over the horizon. The Fed is in no hurry, and barring a surprise turn in the data or a trade torpedo, policy likely remains on autopilot through August.

The bottom line: We’ve been here before—markets ignoring looming risks in favor of near-term momentum. But each time it feels a bit different, because the backdrop is different. The fiscal story is louder, the Fed is more cautious, and the geopolitical script is more improvisational. For now, the music’s still playing. Just know where the exits are.

“One big beautiful bill” – a fiscal firework show with a debt hangover

If the market was looking for a jolt to shake it out of the summer stupor, the One Big Beautiful Bill Act delivered fireworks that would make even the most jaded deficit hawks reach for their earplugs. Pitched as a pro-growth, pro-investment, America-first economic package, this sprawling legislation is part tax cut, part fiscal cannonball—and all-in on juicing near-term activity. But beneath the red-white-and-blue fanfare lies a budgetary beast that could shape the path of yields, Fed policy, and macro volatility for years to come.

From a market lens, the bill is a tale of two tapes.

On the front end, it’s stimulative—real money in workers’ pockets now, an incentive-heavy buffet for corporates, and a clear nod to the reshoring narrative with full expensing for new factory builds. Tips and overtime become tax-light, SALT deductibility gets a steroid shot, and business capex is practically being begged for. This will support consumption and manufacturing-linked equities—think domestic cyclicals, builders, and machinery names.

But for the bond market, this thing bleeds red ink.

Even with trims to Medicaid, food stamps, and green subsidies, the Penn Wharton model puts the 10-year deficit add at $3.2 trillion. The CBO is even gloomier. With debt-to-GDP heading north of 120%—levels last seen in the fog of World War II—the question isn’t whether Treasury issuance will rise, but whether the market can absorb it without pushing term premia and rates structurally higher.

Yes, there's a growth boost coming—modest in 2025, stronger in 2026 if the multiplier math holds—but it’s a sugar rush funded by IOUs. That dynamic could give the Fed just enough cover to stay on the sidelines longer, especially if inflation rises due to tariffs. But don’t mistake this for a re-run of 2017’s tax euphoria. That episode came with synchronized global growth and a disinflationary tailwind. This one arrives against the backdrop of deglobalization, tariff skirmishes, and structural labour constraints.

The FX market may also start to feel the tug-of-war. On one hand, fiscal expansion tends to support domestic demand and short-end yields, offering a floor for the dollar. On the other, ballooning deficits and the threat of rating chatter could weigh on long-term credibility—especially if tariffs tighten financial conditions or spark geopolitical blowback.

In trader terms, the OBBBA is a tactical bid and a structural fade. It juices near-term GDP but sows the seeds of long-term crowding out. For now, equities may keep dancing, especially in sectors tied to defense, border security, and domestic infrastructure. But duration traders are already eyeing the exit, and rate vol desks are sharpening their pencils.

This isn’t just a budget. It’s a full-frontal fiscal experiment—and the market’s tolerance for this kind of dosage may depend less on growth and more on how quickly the interest expense clock ticks from noisy to deafening.

Bottom line: Fireworks today, debt ceiling déjà vu tomorrow. Watch yields, vol, and the trade file—because the next surprise might not come from the bill, but from the bill collector.

Chart of the week

Earnings season: Tariffs meet the bottom line

As the curtain rises on Q2 earnings, Wall Street will be watching less for beats and misses—and more for bruises and bandages. This reporting season isn’t just about revenue lines and EPS surprises; it’s a stress test on how corporate America is absorbing—or deflecting—the rising cost of doing business under Trump’s tariff regime.

According to Goldman’s equity team, the base assumption is that firms are passing along roughly 70% of those tariff costs to end consumers. But that thesis hasn’t quite shown up in the macro data. CPI remains well-behaved, and retail prices haven’t surged in the way classical economics might predict. That leaves a puzzle: either firms are quietly eating margin, or price hikes are coming with a lag—or worse, not sticking at all.

Kostin notes that price increases so far have been "modest" and mostly concentrated among firms directly in the crosshairs of the tariff map. That aligns with what we’ve seen anecdotally: retailers and manufacturers nibbling at price tags, but stopping short of full pass-through. Margin commentary this quarter will be critical. If price pressures are being absorbed, we could see earnings compression—particularly in tariff-heavy sectors like apparel, autos, and industrials.

For investors, the risk isn’t just earnings misses—it’s guidance resets. If companies start flagging demand elasticity or inventory adjustments tied to trade policy, it could shift sentiment quickly, especially with valuations already perched near the top of the range.

So while the market has been trading more on macro and monetary hopes in recent weeks, Q2 earnings may yank the spotlight back to micro fundamentals. After all, tariffs may be crafted in Washington, but they’re felt on Main Street—and shown, in plain sight, on corporate income statements.