Wall Street’s Reality Distortion Field: Why Markets Ignore the Trade War—And What Happens Next

Markets Climb a Wall of Worry—And Keep Climbing

Call it Wall Street’s favorite magic trick: In May, the S&P 500 logged its best month since November 2023, up over 6%, while the Nasdaq surged nearly 10%—all as U.S.-China trade tensions threatened to ignite a fresh tariff war and the U.S. dollar notched its fifth straight month of decline (CNN).

So, what gives? Is this market strength a bullish shrug, or a warning sign of risk blindness?

Tariffs, Tweets, and the “TACO” Trade

Markets wobbled as President Trump accused China of “totally violating” trade agreements, fueling fears of more tech sanctions and retaliatory tariffs. Tech stocks took a hit, with the S&P and Nasdaq both dropping over 1% intraday before recovering.

But here’s the twist: Wall Street, betting on the “TACO” trade (“Trump Always Chickens Out”), expects tough talk but not a sustained escalation (Reuters). As one UBS strategist put it, “investors continue to navigate a range of market, economic and geopolitical risks,” but keep buying dips anyway.

The Data Wall Street Ignores (for Now)

• S&P 500 May Gain: +6% (strongest since Nov. 2023)

• Nasdaq May Gain: +9.5%

• Dollar Index (DXY): Down 8% YTD, 5-month losing streak (Trading Economics)

• Consumer Spending: New Fed data shows April spending dropped sharply, even as inflation eased (Federal Reserve Data).

The Fed’s preferred inflation gauge cooled, but cracks in consumer demand are widening—a classic sign late in the cycle.

Why This Matters: Bubble, Rotation, or Global Repricing?

This disconnect—stocks surging as trade and currency risks mount—raises three possibilities:

1. Global Rotation: With the dollar weakening, global capital keeps pouring into U.S. equities as the “least dirty shirt” in a risky world.

2. Liquidity Bubble: AI hype and continued Fed liquidity drive flows, regardless of macro risks.

3. Narrative Denial: Markets are trained to fade political noise, but this time the underlying issues (tariffs, weak consumer data, dollar decline) could bite.

Which story wins out will shape everything from commodity prices to global capital flows over the next six months.

The Gamp Sheet Take: Prepare for More Volatility

“Even though the stock market has staged a decisive rebound since the April lows, there is still plenty of uncertainty on tariffs, especially given the legal battle that is brewing,” says Clark Bellin of Bellwether Wealth (CNN).

Expect turbulence: legal battles over tariffs, unpredictable Fed moves, and continued USD weakness could all reverse the recent euphoria in a heartbeat.

Sources

• CNN: S&P 500 posts best month since 2023 as Wall Street tries to ignore the trade war

• Reuters: Global Markets Wrapup

• Yahoo Finance: S&P 500 Chart

• TradingView: DXY Chart

• Federal Reserve Economic Data

Questions for Gamp Sheet readers:

• Is this the last hurrah for U.S. equities, or does global capital have nowhere else to go?

• How long can markets ignore the dollar’s decline and trade risks?