The market has overfitted the impact of tariffs.

The current rebound in the U.S. stock market still has momentum, but be wary of the tariff risks on April 2nd. The TLT bond fund dropped a full percentage point the other day, clearly indicating that safe-haven funds are starting to pull out. Right now, everyone is fixated on tariffs potentially crippling the economy while selectively ignoring stagflation. Trump said tariffs might be dialed back a bit, which could suppress recession expectations and cool inflation expectations. But the sharp rally in commodities creates a contradiction. Simply put, the market’s predictions for inflation and recession are completely misaligned—overfitting the impact of inflation while underfitting the risk of recession.

The recent wild swings in the U.S. stock market are largely blamed on the Trump administration’s tariff policies, more like a collective emotional outburst than a reflection of fundamentals. Since Trump took office in January, the S&P 500 has dropped over 10%, and the Nasdaq has plunged nearly 15%. On the surface, trade friction from tariffs directly hits corporate profit expectations, as seen in the pressure on the manufacturing sector. But the market is clearly exaggerating the impact of a single variable—the squeeze on U.S. stock valuation bubbles was inevitable anyway.

The deeper contradiction lies in investors treating tariffs as the trigger for a recession while selectively ignoring the inherent weakness of the U.S. economy. The Atlanta Fed’s model suggests Q1 GDP could shrink, Goldman Sachs has already cut growth forecasts, and wage growth exceeding expectations is pushing up inflation, narrowing the Fed’s room for rate cuts. This "tariff panic" masks the market’s real ailment: when rate hike expectations, slowing corporate earnings growth, and policy uncertainty converge, any minor trigger can set off algorithmic trading-driven chain reactions. In fact, some funds are already positioning contrarily—bargain-hunting in quality tech stocks like NVIDIA and unusual moves in the crypto sector hint at growing market divergence.

Historical experience shows tariffs’ real economic impact often lags by over six months, yet current U.S. stock pricing is clearly over-discounting short-term sentiment, trapped in a self-reinforcing pessimistic narrative. This overfitting is essentially a stress response from a lack of confidence—when faith in "American exceptionalism" crumbles, any policy fluctuation is interpreted as a sign of systemic risk. As Morgan Stanley put it, the core issue isn’t tariffs but the market finally realizing a decade-long bull run had already exhausted all optimistic assumptions. $Dow Jones Industrial Average(.DJI.US) $SPDR S&P 500(SPY.US) $NASDAQ Composite Index(.IXIC.US) $Tesla(TSLA.US) $TENCENT(00700.HK) $XIAOMI-W(01810.HK) $NVIDIA(NVDA.US) $AMD(AMD.US) $Microsoft(MSFT.US)