The stock market wasn't supposed to look like this under Trump 2.0

Happy Friday, investors. Today’s edition decodes the stock market’s latest pullback and the limits of US exceptionalism. First time reading? Join 190,000 self-directed investors gaining an edge every morning. Sign up here.

Mismatched assumptions

Investors thought they had the playbook figured out entering 2025.

A second Trump administration and all its America-first, pro-business, deregulatory galore was supposed to supercharge the stock market’s record bull run and fuel economic growth.

Wall Street went all in, piling into tech stocks, cryptocurrencies and risk assets under the assumption that the America-first president would make it even easier to bet on US markets.

Two months into the new year, that bet is unraveling.?

As of Thursday’s close, the S&P 500 and Nasdaq are both negative year-to-date. The Magnificent Seven names responsible for most investors’ returns the last two years have lost their shine.?

Meanwhile, stock benchmarks in Korea, Italy, China, Brazil and others are surging ahead of those in the US.?

“Reasons for overseas markets’ strong recent showing include relatively attractive valuations, the emergence of competitive Chinese AI technology, and progress toward ending the Russia-Ukraine war,” said Mike Dickson , head of research at Horizon Investments.

Testing US exceptionalism

Turns out that throwing new ideas at long-standing economic pillars — trade, budget deficits, spending — isn’t so stabilizing for financial markets.?

President Trump’s agenda disrupts the assumptions upholding the American economic machine. Tariffs, whether they come to fruition or not, raise uncertainty. And cost-savings aside, laying off hundreds of thousands of federal employees while reversing immigration trends puts pressure on a labor market that’s already shown cracks.?

“Tariffs likely raise prices, at least in the short term, on a population still suffering from the inflation of the last few years,” DataTrek Research founders Nick Colas and Jessica Rabe wrote in a note Thursday. “Restrictions on immigration will reduce growth in the US labor force and possibly push wages higher. Government layoffs may increase unemployment.”

Sprinkle all that over a pricey, AI-juiced stock market smashing records every other week and you have a recipe for a pullback.

Indeed, neither Nvidia’s eye-watering earnings nor solid GDP data helped investors this week. Citi’s Economic Surprise Index — a measure of whether economic data is exceeding or missing expectations — hovers at a six-month low.?

Consumers, too, have soured. The University of Michigan’s sentiment survey just fell to its lowest level in over a year, with inflation once again cited as the top concern.?

And if inflation expectations become entrenched, it complicates the Federal Reserve’s plans to ease interest rates.?

Investors are now recalibrating in real time. The recent dip in US stocks isn’t yet catastrophic, but the erosion of confidence is there.

That’s a problem when equities remain expensive, expectations are still high, and uncertainty — across trade, fiscal and monetary policy — is mounting.

The question isn’t whether markets will bounce back, but whether this year’s downturn will finally lay bare the limits of American exceptionalism.

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