Stock market slides after tariff surprise

Never a dull moment. Fresh on the heels of his big, beautiful tax cut win, President Donald Trump surprised most with a fresh volley of tariff uncertainty.

The president unexpectedly revealed a fresh batch of tough talk on tariffs over the weekend after signing the One Big Beautiful Bill Act on July 4.

Related: Legendary fund manager has blunt message on ‘Big Beautiful Bill’

The move poured cold water on an arguably red-hot stock market, sending the S&P 500 lower by 0.8% and the Dow Jones Industrial Average and Nasdaq Composite down about 1%. Since pausing reciprocal tariffs for 90 days, those indexes have rallied by a somewhat remarkable 19%, 26%, and 35%. 

The new bout of tariff uncertainty could pressure a stock market already beginning to flash warnings on some sentiment indicators.

Tax cuts get trumped by tariffs

The One Big Beautiful Bill Act included a healthy slate of tax cuts, which is good news for consumers and companies.

Americans over age 65 get a new bonus deduction totaling $6,000, up from $2,000 previously, while residents in high-tax states got a massive increase in the SALT tax deduction to $40,000 from $10,000.

Related: Who saves money due to ‘Big Beautiful Bill’ tax cuts?

Additionally, the big, beautiful bill included a deduction on up to $25,000 in tip income, and it doubles the estate tax to $30 million for married couples filing jointly. 

For businesses, it also made the 20% qualified business income (QBI) deduction under Section 199A permanent, reinstated deductions for research and development, and rebooted first-year 100% bonus deductions for certain equipment.

In short, the passage of the Big Beautiful Bill Act not only provides some clarity for consumers and businesses, but extra money in pockets that can flow to risk assets, such as stocks.

Unfortunately, the good news didn’t translate into gains for the major indexes because of President Trump’s renewed tough talk on tariffs.

Trump threatened 25% tariffs on Japan and South Korea, plus warned of a possible 10% tariff on countries choosing to align themselves with Brazil, Russia, India, and China, otherwise called the BRIC nations.

He also targeted a few other countries, suggesting tariffs of 40% on goods from Laos and Myanmar, 30% on South Africa, and 25% on Malaysia and Kazakhstan.

Stocks whipsaw on return of tariff, trade battles

The 90-day window for inking trade deals opened by Trump on April 9 closes July 9. Many have expected President Trump to extend the deadline to continue propping up markets, so the renewed offensive ratchets up concerns that we may not have heard the last of on tariffs.

Related: Secretary Bessent drops blunt 4-word message on ‘Big Beautiful Bill’

While the threatened tariffs were bad news for markets because they marked a return to uncertainty, President Trump plans to extend the July 9 deadline to August 1.

That’s good news; however, it’s not a long extension. The compressed timeline may mean more tough talk in the coming weeks that could move markets.

It certainly wasn’t great for the indexes the first go-round. The S&P 500 fell 19% from its February peak through President Trump’s pause decision in early April amid a flurry of tariff announcements, including 25% tariffs on Canada, Mexico, and autos, plus what has since become (after much negotiation) 30% tariffs on China.

This time around, stocks may not react as poorly, given there’s already been a playbook for tariff volatility. Still, the latest salvo comes even as some measures of investor sentiment flash overbought.

For instance, the relative strength index (14) can signal that stocks are due for a break when it exceeds 70. The S&P 500 and Nasdaq Composite had a relative strength reading of 75 and 72, respectively, on July 3. 

Long-time technical analyst Helene Meisler pointed out in a recent TheStreet Pro post a host of sentiment indicators that may be getting a bit frothy, including institutional and individual investor surveys and the Daily Sentiment Index (DSI).

“Finally there is the DSI,” wrote Meisler. “The reading for the VIX is now 16. A reading under 15 is a big yellow flag; single digits is a red flag. The S&P 500 scooted right up to 87 and the Nasdaq is at 86. Over 85 is the yellow zone, while over 90 is the red zone. Let’s call this extreme.”

Finally, the renewed tariff talk happens even as stocks’ valuation has gotten a little over its skis. The S&P 500’s forward price-to-earnings ratio is 22.2. Historically, forward returns for stocks are harder to come by when the P/E ratio gets north of 20.

For perspective, it was last over 22 in February, right around when the S&P 500 made a new all-time high before its tariff-driven retreat.

Coincidence? Perhaps. But something worth watching in the coming days and weeks.

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