Early in President Donald Trump’s second term, Financial Times journalist Robert Armstrong coined the term TACO — for “Trump Always Chickens Out” — to describe his habit of taking an extreme position only to back out at the last minute. Stock traders loved it.
When Trump threatened to put 145% tariffs on Chinese goods or to punish NATO allies who didn’t support his proposal to annex Greenland, Wall Street correctly saw it as an empty threat and the market quickly returned to normal.
“Stock investors believe that the president will ultimately do what is right for the market,” said Mark Zandi, chief economist at Moody’s Analytics. “He uses it as a barometer for judging how well he is doing.”
That explains why Wall Street has been so calm about the war with Iran. Investors have convinced themselves that Trump will end the war if it will prevent a drop in the market.
But the war with Iran is not like last year’s “Liberation Day” tariffs, which the president could impose in a day and then suspend a week later. Iran’s government has its own goals, and it’s not showing signs of rolling over for whatever Trump asks for on a given day. And threatening the U.S. economy is one of its key points of leverage.
“There is a deep-seated belief in Trump chickening out and they’ve seen evidence of that in tariffs,” said Bharat Ramamurti, who served as deputy director at the National Economic Council during the Biden administration. “I think a version of that is happening with the war, but it is far more complicated than imposing tariffs and then not imposing tariffs. There are long lasting impacts from prosecution of the war that will have physical, tangible impacts.”
That has created a massive risk — for Wall Street, for the president and for the economy.
There’s a lot to be worried about here at home. Consumer sentiment is at record lows as gas prices hover around $4.50 per gallon. Inflation continues to rise and for the first time in three years, is increasing faster than wages. The national debt is greater than the size of the U.S. economy, nearly twice the size of the historical average, and interest payments on that debt are expected to surpass $1 trillion this year alone. Already, more tax dollars have been spent paying that interest than for Medicare or Medicaid. And health care spending will only increase as the population ages and is not replaced quickly enough by younger workers paying into Medicare and Social Security.
Meanwhile overseas, the administration has put tariffs on friends and adversaries alike and, in the process, weakened relations with our closest allies. The Iran war has led to growing concerns about the preeminence of the dollar as the world’s reserve currency. And while Trump doubles down on fossil fuels, China leads the world in clean energy technology. It’s so far ahead in electric vehicle sales that its cars are effectively banned in the United States via exorbitant tariffs and regulations.
Despite everything, for Wall Street, one thing trumps (sorry) all these concerns: artificial intelligence. Technology companies tied to AI today account for nearly half of the S&P 500’s total market capitalization. Investor enthusiasm for the “Magnificent Seven” — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — regularly pushes the market to record highs, even if many of the other 493 companies are lagging behind.
“AI runs on its own dynamic independent of anything,” Zandi explained. “The economy? The Iran war? It’s on its own glide path.”
The billions of dollars spent on AI investments — from chips to computers to data centers — are driving economic growth. Wall Street is eagerly waiting for SpaceX, OpenAI and Anthropic to go public this year, possibly adding $5 trillion to the market. With so much money at play, the fear of missing out has kept many investing, even if some warn about a possible bubble.
“If history is any guide,” Zandi said, “the market is getting ahead of themselves, discounting too much of what is going on in Iran and the rest of the world and the President’s ability to shore up the market if need be.”
The worry is if there’s a moment when investors suddenly reconsider and decide as a whole to bail. Since they have been singularly focused on AI, it could be as simple as one of the leading companies announcing an unexpected setback or not making as much money as expected. At that moment, everything else happening in the world, especially as a result of the Iran war, could come into focus.
“The closure of the Strait of Hormuz is more than an energy shock,” Diane Swonk, chief economist at KPMG, wrote in a recent report. “It is roiling supply chains around the world in ways that echo the disruptions we saw during the pandemic.”
In March 2020, when investors finally understood how Covid-19 could impact the real economy, the markets crashed. If that happened today, there might not be much the president could do. Even if he announced a peace deal today that reopened the Strait of Hormuz immediately, estimates are it could be well into next year before things return to normal. Patrick De Haan, head of petroleum analysis at GasBuddy, estimates that for every day the Strait remains closed, it could take about a week to get back to regular oil shipments from the Gulf. That puts a complete recovery well into 2028.
For now, at least, the drip, drip, drip of bad news as a result of the war is not worrying the markets so much. That is, until it does. It’s a bit like Ernest Hemingway’s description of how a person goes bankrupt: “Gradually, then suddenly.”
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