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financial struggles of Americans to bring the war to an end.
And yet, stock markets have not only recovered from their losses—they are thriving.
Even before the conflict began, the US stock market demonstrated incredible resilience against political and economic volatility. The market has brushed off the Covid-19 recession and generational-high inflation, absorbed Russia’s invasion of Ukraine, and increasingly ignored Trump’s tariff disputes. Everyday Americans continue to grapple with an affordability crisis and plummeting consumer confidence, yet the markets continue to climb.
Certainly, Wall Street still experiences down days. However, the tech-heavy Nasdaq index has continued to surge amid sustained investment in AI. The index has risen 11% since the start of the year—nearly half of the total gains it recorded last year. The Dow and S&P 500 continue to hover near record highs.
Each time investors shrug off the latest shock and reach new peaks, questions arise: what is driving this phenomenon, and how long can this bull market last?
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Some economists point to a mindset that investors have adopted—the belief that the president will retreat from his most extreme policies: Trump Always Chickens Out, or Taco.
Backtracking on threats has been a hallmark of Trump 2.0, particularly regarding tariffs and Iran. When Trump announced his slate of “liberation day” tariffs, he delayed their implementation just hours after the announcement. He similarly threatened a 25% tariff on eight EU countries when he was angered by the annexation of Greenland. Those tariffs were also eventually called off.
Now, even as Trump claims the Iran ceasefire is on “life support,” markets continue to rise.
But as Eswar Prasad, a former IMF official and an economist at Cornell, points out, investor confidence during this crisis predates both Trump and the Taco theory.
“Investors now have a pretty clear view that if there is significant trouble in the financial system, the [US Federal Reserve] and the US government will step in and not let things get too deep into the hole,” Prasad said.
However, federal intervention during a crisis—such as the collapse of regional banks like Silicon Valley Bank, whose depositors were bailed out by the government—can mask underlying risks, Prasad noted, especially as supervision and regulation of financial markets weaken.
“This is a concern we already saw with how ineffective supervision led to problems with Silicon Valley Bank and First Republic” in 2023, Prasad said. “The question is, where is the risk being hidden right now?”
The K-shaped economy
Although inflation has decreased since hitting a 40-year high in 2022, Americans are still feeling the impact of rising costs. Amid the war with Iran, inflation has begun to climb once again. In April, annual inflation surged to 3.8%, up from 2.4% in February.
Higher prices would typically result in reduced spending across the board. Instead, wealthier Americans continue to spend while lower-income households struggle to manage their budgets.
The most recent evidence of this came through a report from the New York Federal Reserve, which showed that while low-income Americans have faced difficulties, the top tier of the economy remains resilient.
“Our consumers, which sit at the top of the ‘K’, are continuing to invest in travel, it’s their priority, and they want to have that experience,” Ed Bastian, the Delta Air Lines CEO, told investors.
