If Samuel Beckett’s Waiting for Godot were to be rescripted today, the main characters, Vladimir and Estragon, might most appropriately be an economist and a market strategist, and the “Godot” that they are interminably waiting for would be inflation. However, unlike the original Vladimir and Estragon, these characters would pass the time engaging in intellectual discussions about the presumed inevitability of President Trump’s trade and tariff policies leading to a surge in inflation and why it isn’t showing up in the economic data, at least not yet.
In the play, Godot never arrives. Will the same also be true of the anticipated surge in inflation? Complicating matters is that there is a secondary and almost equally important question. Specifically, if one assumes that the higher costs presumably associated with tariffs will ultimately be passed on to the American consumer (something that most economists and strategists expect, but which the White House denies), will it be limited to a one-time (albeit permanent) reduction in the purchasing power of the American consumer, or will it catalyze a prolonged period of regular and ongoing price increases? The answers to these two questions will likely be highly influential on the future outlook for both the markets and the economy, as they may largely determine if, when, and by how much the Federal Reserve can ultimately lower interest rates.
Despite the fact that those critically important questions remain unresolved, there is a growing body of evidence that suggests that both consumers and investors are becoming increasingly inured to the inflation risks associated with the administration’s trade and tariff policies. You can see this in both the decline in inflation expectations (above) and the UBS Tariff Fear Gauge (below), which shows that, on both sides of the Atlantic, investors are largely dismissing the threat of draconian tariffs as being more theater than substance and thus largely irrelevant.
The same is arguably true of America’s corporate executives as, according to Schwab’s Chief Investment Strategist, Liz Ann Sonders, earnings calls from S&P 500 companies show fewer concerns about inflation than at any time since 2021. 1 This is despite the fact that the Yale Budget Lab projects that U.S. economic growth this year will be approximately one percentage point lower due to tariffs, with a persistent 0.4% drag in the years to come and that this year’s tariffs will cost the average U.S. household $2,500. 2
So, how can one account for this conundrum? There are a variety of reasonable explanations, three of which were detailed in a recent report from Alliance Bernstein (above), where they attribute it to the facts that 1) domestic importers loaded up on inventory in advance of the anticipated tariffs, and are at least partially still selling off their pre-tariff inventory, 2) that China has been avoiding the most onerous of the tariffs by shipping goods to the U.S. through less tariffed countries, while many imports from Mexico and Canada are at least temporarily excluded from the new tariffs under the USMCA trade agreement and 3) that record-high profit margins are, at least for the time being, allowing domestic retailers to absorb some of the higher tariff-related costs.
However, by their very nature, these temporary reprieves for tariff-related inflation are likely unsustainable: 1) as retailers have already drawn down most of their pre-tariff inventories (as illustrated in the above Alliance Bernstein chart), 2) because President Trump is imposing near-universal tariffs, which will largely eliminate China’s “pass-through” strategy, 3) because the USMCA trade agreement is scheduled to be either renegotiated or terminated in less than a year, and 4) because retailers cannot afford to continue sacrificing their profit margins by continuing to absorb the higher tariff-related costs.
Indeed, according to estimates from the Federal Reserve, U.S. consumers will absorb about 50% of the tariff cost, while U.S. businesses will absorb about 40% of the costs (thus depressing profit margins) and foreign exporters will absorb about 10%. Research from Goldman Sachs predicts an even less benign consumer outlook, as they estimate that U.S. consumers will end up absorbing around 70% of the tariff costs while importers and exporters will each absorb about 15% of the tariff costs. See the above chart.
So, when should we expect to see “Godot’s” long-awaited arrival? According to Apollo Global Management’s renowned Chief Economist, Torsten Sløk, “the most damage from Donald Trump's trade war will be felt in the economy sometime around the end of the year [and] that the sweeping tariffs the president announced this year will push prices higher until inflation reaches a peak in November or December”. He has also warned that “the US was already beginning to see a stagflation shock, a situation where inflation rises while economic growth slows”. 3
According to Bloomberg, “among Fed policymakers and private sector economists, the general view of tariffs has been that they would hit sometime over the summer [given that] Trump’s biggest and broadest tariff salvo didn’t come until April.” 4
These perspectives were just echoed by New York Fed President John Williams, who remarked in a recent speech to the New York Association for Business Economics that the higher tariffs put in place by the Trump White House this year will “boost inflation by about 1 percentage point over the second half of this year and the first part of next year”. 5
As it turns out, that perspective appears highly prescient, as June’s consumer inflation data suggests that “Godot’s” arrival is looking increasingly imminent. The June Consumer Price Index (C.P.I.) came in at 2.7% year-over-year, which admittedly doesn’t look too worrisome on the surface, despite it being the highest rate in four months. 6 This is because higher tariff costs were largely offset by lower gas and travel prices and, most importantly, an ongoing decline in shelter costs, which on their own represent 35.5% of the entire C.P.I. 7
Shaded Areas Indicate Recession.
However, for the first time since the start of the trade war, the June Consumer Price Index showed that the retail prices on many of the most heavily tariffed items, like clothes, shoes, furniture and electronics, rose significantly, with the cost of household appliances actually experiencing the biggest monthly jump since records started in 1999. 8
According to J.P. Morgan economist, Michael Hanson, this “belies” the narrative that tariffs aren’t flowing through into consumer prices. He added that “the three-month increases for a range of goods, including household appliances, window and floor coverings, sporting goods, and other household and recreational items, are approaching—if not already well above—10% annualized”. 9 Goldman Sachs just released a note to the firm’s clients predicting that baseline tariffs will rise to 15%; that tariffs will reduce U.S. economic growth from 2% to 1% in 2025; that 2025 core inflation will increase to 3.3%, and that tariffs will increase core inflation by 1.7% over the next 2-3 years. 10
While President Trump’s trade and tariff policies are, from our perspective, fraught with risks, that is not to say that they are without some offsetting merit. After all, U.S. customs duties topped $100 billion for the first time ever in a single year this month, which is even more remarkable when you consider that most of President Trump’s new tariffs haven’t even taken full effect yet. 11
The U.S. pulled in over $27 billion in tariffs in June alone, according to the Treasury Department. That helped produce a surprise $27 billion budget surplus for the month. Further, Treasury Secretary Scott Bessent suggests that tariff revenue could exceed $300 billion by year-end if the administration’s plan stays on course. 12
Moreover, according to Monica Guerra, head of US Policy at Morgan Stanley Wealth Management, the U.S. Treasury could collect as much as $2.7 trillion in tariffs over the next 10 years. 13 That could be hugely important as, if correct, it would offset a significant portion of the $3.4 trillion that is being added to the U.S. national debt over the same period, as a result of President Trump’s “One Big Beautiful Bill”. 14
It should also be noted that previous “investor concerns that President Trump’s sweeping ‘Liberation Day’ tariffs could tip the global economy into a recession have faded significantly, according to Bank of America’s latest Global Fund Manager Survey. The July poll found that a net 59% of managers now believe a recession is unlikely in the near term — a dramatic reversal from just three months ago, when a net 42% feared a downturn following the announcement of broad-based tariffs in April.” 15
This sentiment is part of a growing trend towards increased optimism, if not outright complacency. Remarkably, despite this year’s massive surge in policy-related uncertainty, which has actually exceeded levels reached during the Global Financial Crisis and the COVID-pandemic global shutdown (see below), it has only briefly (albeit quite violently) impacted the domestic equity markets. Indeed, investors do not seem to be particularly concerned about the economy, profits, recession, trade wars or political turmoil. This virtual lack of fear may be the thing that investors need to worry about most.
As we noted in the June Per Stirling Capital Outlook, “because markets are forward-looking, absolute measures like “good” and “bad” are much less important than relative measures like ‘better than expected’ or ‘worse than expected’. When a great deal of good news is already priced in (as is the case with many U.S. stocks), ‘better than expected’ can become a very ‘high bar’ to clear”. By the same logic, a market where very little of the potential for “bad news” is reflected in prices creates an environment where worse than expected news can have an outsized impact.
This does not necessarily mean that current investor expectations need to be wrong and that markets will take a bearish turn. That said, it may mean that, because this bullish outlook is already priced into the markets, it may leave relatively little upside potential, as markets very rarely go up or down on the same news twice. By the same token, since so little of the potentially bearish outcomes are currently reflected in the markets, any outcome outside of the current rosy expectations could force a repricing of financial assets.
In a recent article, Bloomberg posited that: “The conventional wisdom on Wall Street appears to be that the US stock market’s latest march to record [highs] has been unabated because, when it comes to tariff threats, President Donald Trump talks loudly but carries a small stick.”16 Ultimately, time will tell if this perspective is correct, or if Wall Street is being overly dismissive of the impact of the President’s trade and tariff policies.
With the S&P 500 Index already trading at about 22 times forward earnings, which is near its richest valuations in the post-Covid era, and the Bank of America Global Fund Manager Survey reflecting the largest 3-month rise in risk appetite on record 17, the markets appear potentially overly optimistic and even complacent.
“Because we are priced for perfection, any disappointment, deviation from that on the downside, we could see stocks re-rate,” said Paul Nolte, market strategist at Murphy & Sylvest Wealth Management. As he put it, ‘There’s a balloon wandering around Wall Street looking for a pin, and nobody knows what that pin is. It could well be this.’” 18
Despite such near-term concerns about valuation and investor complacency, we believe that the intermediate and longer term “path of least resistance” for most risk assets, including stocks, is still from the lower left to the upper right (bullish). Indeed, if the news turns out to be as investor friendly as expected, the short-term outlook could be equally benign. However, until we get better clarity on inflation, investors may want to remember the sage words of Warren Buffet that one should “be fearful when others are greedy and greedy when others are fearful”.
Disclosures
Advisory services offered through Per Stirling Capital Management, LLC. Securities offered through B. B. Graham & Co., Inc., member FINRA/SIPC. Per Stirling Capital Management, LLC, DBA Per Stirling Private Wealth and B. B. Graham & Co., Inc., are separate and otherwise unrelated companies.
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Definition
The Standard & Poor's 500 (S&P 500) is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S with each stock's weight in the index proportionate to its market. It is not an exact list of the top 500 U.S. companies by market capitalization because there are other criteria to be included in the index.
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The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.
Citations
Opening Image “What is a tariff?”, Autovista24, Posted 3/18/2025, What is a tariff?
- “Tariffs Top $100 Billion As Trump’s Trade War Heats Up”, Frank Holmes, Posted 7/18/2025, https://www.usfunds.com/resource/tariffs-top-100-billion-as-trumps-trade-war-heats-up/?mkt_tok=NDk3LVNLVi0yNjIAAAGbvqGb-7v2fX1daQlzOjBHst
- “State of Tariffs: July 11, 2025”, The Budget Lab at Yale, Posted 7/11/2025, https://budgetlab.yale.edu/research/state-tariffs-july-11-2025
- “Here's when a top economist says the US will see the most damage from Trump's tariffs”, Jennifer Sor, Posted 7/18/2025, Here's when a top economist says the US will see the most damage from Trump's tariffs
- “Powell’s Caution on Tariff-Driven Inflation Is Right”, Jonathan Levin, Posted 7/15/2025, https://www.bloomberg.com/opinion/articles/2025-07-15/powell-s-caution-on-tariff-driven-inflation-is-right?sref=YfRIauRL
- “Fed’s Williams says tariffs are pushing up inflation, and he expects even higher prices in coming months”, Greg Robb, Posted 7/16/2025, Fed’s Williams says tariffs are pushing up inflation, and he expects even higher prices in coming months - MarketWatch
- “Here’s how Trump’s tariffs could be impacting prices for US consumers”, Alicia Wallace, Posted 7/15/2025, https://www.cnn.com/2025/07/15/economy/us-cpi-consumer-price-index-inflation-june
- “Measuring Price Change in the CPI: Rent and Rental Equivalence”, U.S. Bureau of Labor Statistics, Posted 4/9/2025, https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htm
- “Tariffs Are Showing Up in Inflation. Why Trump Can’t Afford to Ditch Powell.”, Barron’s, Posted 7/16/2025, Tariffs Are Showing Up in Inflation. Why Trump Can’t Afford to Ditch Powell and 5 Other Things to Know Today. - Barron's
- “Review & Preview”, Megan Leonhardt, Posted 7/17/2025, Subscribe to Review & Preview Newsletter - Barron's
- “Goldman Sachs Sees Trump’s Baseline Tariff Rate Rising to 15%”, Swati Pandey, Posted 7/22/2025, https://www.bloomberg.com/news/articles/2025-07-23/goldman-sachs-sees-trump-s-baseline-tariff-rate-rising-to-15?sref=YfRIauRL
- “Tariffs Top $100 Billion As Trump’s Trade War Heats Up”, Frank Holmes, Posted 7/18/2025, https://www.usfunds.com/resource/tariffs-top-100-billion-as-trumps-trade-war-heats-up/?mkt_tok=NDk3LVNLVi0yNjIAAAGbvqGb-7v2fX1daQlzOjBHst
- “Tariffs Top $100 Billion As Trump’s Trade War Heats Up”, Frank Holmes, Posted 7/18/2025, https://www.usfunds.com/resource/tariffs-top-100-billion-as-trumps-trade-war-heats-up/?mkt_tok=NDk3LVNLVi0yNjIAAAGbvqGb-7v2fX1daQlzOjBHst
- “Trump’s tariffs are turning into a ‘mosaic’ that will be ‘idiosyncratic,’”, Nick Lichtenberg, Posted 7/17/2025, https://www.msn.com/en-us/money/markets/trump-s-tariffs-are-turning-into-a-mosaic-that-will-be-idiosyncratic-morgan-stanley-says-projecting-a-2-7-trillion-haul-over-10-years/ar-AA1INAtG?ocid=BingNewsSerp
- “Trump’s ‘big beautiful bill’ is projected to add $3.4 trillion to the debt, budget office says”, Sahil Kapur, Posted 7/21/2025, Trump's 'big beautiful bill' is projected to add $3.4 trillion to the debt, budget office says
- “Recession Fears Ease as Profit Optimism Grows Despite Tariff Worries, BofA Finds”, Joe Palmisano, Posted 7/25/2025, Recession Fears Ease as Profit Optimism Grows Despite Tariff Worries, BofA Finds - Connect Money
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