MW Why U.S. stocks and bonds have 'healthy' returns this year despite Trump's tariff threats

By Christine Idzelis

'The new administration has implemented radical policy changes that should, at least in theory, have boosted inflation and slowed growth,' says J.P. Morgan Asset Management's David Kelly

Stocks and bonds in the U.S. are up this year, seeming to shrug off historically large tariffs even as investors remain watchful for delayed impacts of President Donald Trump's policy changes.

Stocks and bonds in the U.S. were little changed Monday morning, as investors weighed Trump's weekend posts on his social-media platform Truth Social indicating that the European Union and Mexico each face 30% tariffs Aug.1.

"The new administration has implemented radical policy changes that should, at least in theory, have boosted inflation and slowed growth," said David Kelly, chief global strategist at J.P. Morgan Asset Management, in a note emailed Monday. "And yet, almost six months after Inauguration Day, both unemployment and inflation are virtually unchanged from the start of the year, while U.S. stocks and bonds have generated healthy year-to-date returns."

The S&P 500 SPX has risen more than 6% in 2025 and is trading near its all-time record high logged July 10, according to FactSet data, at last check. The U.S. bond market is also up in 2025, with the iShares Core U.S. Aggregate Bond ETF AGG posting a total return of 3.2% through Friday.

"U.S. markets, hardened by years of unruly words and abrupt policy changes from Washington," have appeared to "keep calm and carry on," wrote Kelly. "For all that has been written about policy shocks, both the economy and financial markets have seen surprisingly few effects ... so far."

While financial markets were initially rocked by the surprisingly large "liberation day" tariffs that President Trump announced April 2, stocks recovered after the White House later paused the levies as the U.S. negotiated with its trading partners. This month, Trump has been posting over social media the letters he sent to several countries on the tariffs that the U.S. will impose on them starting Aug. 1

'Countervailing forces'

Markets may be up this year despite tariffs because of "countervailing forces such as AI excitement, lower gasoline prices and the promise of fiscal stimulus and deregulation," said Kelly. The healthy performance for stocks and bonds year to date may be partly due to "delays in policy implementation and further delays in economic impacts," he said.

For example, Kelly estimated that the full impact from higher tariff rates on revenues for the U.S. might not be seen until November. "Goods that had left port before April 5 didn't have to pay the higher duties announced on April 2 or in the days that followed," he wrote.

"To further complicate matters, while the 90-day pause window on so-called reciprocal tariffs ended on July 9, the President has, over the past two weeks, announced new tariffs on many countries including Brazil, Canada, the European Union and Mexico, as well as on copper imports in general, all set to take effect as of August 1," said Kelly.

Investors are watching retailers for any signs that they may be passing higher tariff costs to consumers. All eyes will be on Tuesday's inflation reading from the consumer-price index.

"Tuesday's CPI report for June may reflect just the first impacts of higher tariffs, with almost all of the impact on consumer prices still to be seen in the months ahead," said Kelly.

Investors will also be monitoring potentially delayed impacts from the White House's crackdown on immigration and federal job cuts, according to his note. Kelly cautioned that there's a tendency for consumers, businesses and markets to underreact before overreacting.

Read: How junk bonds are signaling the same optimism about the U.S. economy as stocks

"The economy and markets could still get kicked by a sudden surge in unemployment or inflation or a sudden drop in stock prices, and the risk of this may increase if businesses and investors continue, for the moment, to underestimate the eventual impact of dramatic policy changes," he said. "For this reason, it is still a good idea to search for balance as the policy actions of the first half of 2025 generate the policy effects of the second half."

The Dow Jones Industrial Average DJIA and S&P 500 were each trading nearly flat in early afternoon trading Monday, while the technology-heavy Nasdaq Composite increased 0.2%, according to FactSet data, at last check.

As for fixed-income markets, the iShares Core U.S. Aggregate Bond ETF, which tracks the investment-grade bond market in the U.S., was edging down a slight 0.1%, FactSet data showed around midday Monday.

Treasury yields were rising modestly in early afternoon trading. The 10-year Treasury rate BX:TMUBMUSD10Y was increasing about 2 basis points to around 4.43%, while the 2-year Treasury rate BX:TMUBMUSD02Y edged up about 1 basis point to around 3.9%, according to FactSet data, at last check. Bond yields and prices move in opposite directions.

Check out: Bond-ETF inflows surge as demand returns for Treasurys

-Christine Idzelis

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July 14, 2025 12:42 ET (16:42 GMT)

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