Will Wall Street turn on Trump — and Elon?

The vibes are changing on Main Street domestically and abroad, and now in the stock market, too.

The S&P 500 closed at an all-time high, 6144.15 points, just three weeks ago — but since then, it has declined by almost 9 percent after another disastrous trading day on Monday. We’re not yet officially in “bear market territory,” usually defined as a prolonged decline of 20 percent or more. And this column is intended to be descriptive, not as financial advice.¹ Still, the market has now fallen below its close on Nov. 4, the final day before the election, when investors were understandably uncertain about who would win and what this would mean for corporate profits.

Not all of this is Donald Trump’s doing, necessarily. Cycles of optimism and pessimism over AI are having an increasingly large effect on the markets, particularly given competition from China in the form of DeepSeek and now Manus. Still, tariff policy and geopolitical risks have their influences, too. The major American indices are underperforming Europe, Hong Kong and even Canada and Mexico since Nov. 4, though emerging markets like India and Brazil have also struggled.

When I wrote about tariffs last month, I argued that both Wall Street and people who hope that markets can check Trump’s counterproductive impulses were being a bit naive. On the one hand, markets aren’t really capable of strategic behavior like coordinating to discipline Trump by sending him a message:

The short version is that I think this anthropomorphizes markets too much, treating them as having agency and being capable of strategic behavior when instead they’re made up of discrete participants who each have their own incentives. Markets can’t coordinate to “send Trump a message” — Wall Street can’t agree to massively sell off stocks today and then buy them back on Tuesday — because then you could be guaranteed a huge profit and undermine the plan just by defecting from the pact and buying the dip.

On the other hand, if you play out the game theory, various short-term suspensions and exceptions to tariffs don’t defuse the issue in the long term — particularly if Trump is intent on seeing geopolitics and global trade as a zero-sum game. Investors seem to have underpriced the instability this would create and the political realities of how other countries would respond:

But this will likely build up a lot of resentment — nothing creates resentment like capitulating to bullies — and a lot more Leeroy Jenkins energy from our neighbors in the future. If Trump expects to extract some new form of tribute from Canada and Mexico every month in exchange for delaying tariffs, their leaders are eventually going to say fuck you — or their populace is going to elect new leaders. Wall Street might have been pleased by how the situation played out. But it should probably have sold off more when Trump pledged to implement the tariffs in the first place. This was a highly escalatory move with the potential to go badly next time we play the game.

Our former friends are running out of patience with the US

The point about resentment building up among our trading partners now looks especially important. Take a look at what’s happened to the polls in the Canadian election, which will be held no later than October:

In Canada — like most of the Anglo world other than the United States — red parties are liberal, and blue are conservative. So, although Justin Trudeau isn’t running again, his Liberals have entirely closed a massive gap with Conservatives. This comes after Pierre Poilievre, the Conservative leader, was solicitous of Trump. Poilievre and Trump are now feuding, of course.

In the meantime, another of America’s most important allies, Germany, held an election. It didn’t go fantastically well for the Christian Democrats, which, despite what you might assume from their name, are center-right rather than right-wing and establishment-friendly (think of Angela Merkel, the former CDU leader). They got 28.5 percent of the vote, down from a polling peak in the low 30s. Still, they will probably be able to form a government with the SPD, the center-left² party. But the CDU leader and presumptive new Chancellor, Friedrich Merz, has made a show of Europe needing to distance itself from the US.

Other countries are going to take these lessons to heart. Whatever might or might not be the “rational” action, domestic political pressure is going to discourage them from cooperating with Trump.

Recent consumer data isn’t great

Both the University of Michigan’s Consumer Sentiment Index and the Conference Board’s Consumer Confidence Index had bad prints in February, retreating to levels seen in 2023 and 2024 that contributed to Democrats losing the election. These indices can be volatile — they’re survey data — and they’re sometimes misunderstood because many of the questions they ask are forward-looking rather than about current state of the economy. Increasingly, that has produced a big split. Even under Biden, Americans were relatively pleased with the current economic picture, but they didn’t like what the future portended. So the future expectations component of the Conference Board’s survey was lower under Biden than during Trump’s first term — but now it’s lower than during Trump 2.0 too:

How this is affecting broader approval of Trump is hard to say. We recently launched our Trump approval tracker — the numbers are updated almost every day so don’t forget to check them out. Trump’s numbers aren’t bad, exactly — but they’ve declined to a net +1³ from a +12 at the very start of his term and +3 a month ago. Such a decline is common at the start of new presidential terms, and Trump presumably has a relatively high floor (and a low ceiling). But the honeymoon usually lasts a little longer; Biden’s numbers didn’t turn net-negative until the 221st day of his term in late August, 2021.

Will Wall Street’s vibes turn too?

A separate Conference Board index of CEO Sentiment is higher, conversely — but that data was last collected from Jan. 27 through Feb. 10. In other words, before the further escalation of tariffs, the stock market decline, or the increasingly grumpy consumer data. Steven Rattner, the investor and former Obama advisor, wrote in the New York Times last week that his Wall Street buddies weren’t rattled yet and still mostly supported Trump’s agenda, but a bunch of red arrows on the CNBC ticker has a way of changing the mood.

In my own informal conversations with Riverian types, like at the MIT Sloan Sports Analytics Conference this weekend, I’ve picked up perhaps just a little something. In January, there was a lot of “you know, I’m a liberal, but some of the stuff Trump’s doing isn’t so bad…” Now, there’s a higher degree of anxiety about the direction of the country — and sometimes about AI — from people who are often naturally pretty optimistic.

As with any such exercise, I’d advise you not to take this too seriously since there’s surely some sampling bias in my method. But if you want less a touchy-feely indicator, Polymarket traders (I’m an advisor there) now forecast a 38 percent chance of a recession in 2025, and this number has grown dramatically over the past two weeks.

This parallels a sharp decline in the Atlanta Fed’s GDPNow index, which is projecting a negative Q1 following declines in exports and consumer spending. I’ve never done a deep dive into GDPNow and so can’t vouch for it; some investor types regard it skeptically.

Still, it’s not hard to see how we could get there. The indicators GDPNow cites offer a couple of plausible “game scripts”: we could get a recession because of trade wars or because of a decline in consumer demand. Or because businesses famously dislike uncertainty, and they’re getting a lot of it between Trump and AI. You might not do a lot of hiring if you think there’s some chaos to muddle through, especially if you assume that ChatGPT will be able to do the job 80 percent as well as a Stanford MBA at 0 percent of the cost by the time we’re out of it.

Last week’s jobs report was OK but not great, and there will be further job losses reported in future months because of federal worker terminations. I don’t live in Washington, but I’ve started to see some of this creeping into my network from friends describing a shambolic situation at the agencies.

Then there’s Tesla stock — which, granted, isn’t always the best indicator because TSLA has a lot of retail investors. But politics, and perceptions of Elon, are clearly having an effect. Tesla was off by more than 15 percent on Monday (!) and has declined by more than half since its peak in mid-December:

Investors were probably reasonable in assuming that Elon Musk’s relationship with Trump would lead to more favorable treatment for his electric car business and for his other highly regulated enterprises. But there’s a backlash to everything Elon-related in Europe, where Tesla sales are plummeting and his favorable ratings are negative 50. It’s beginning to show up in the US, too, in the form of protests at Tesla dealerships in well-off suburbs. And perhaps even in the White House, with recent reports of high-stakes clashes between Elon and Trump cabinet members. (That there’s so much publicly-reported color and detail in these reports implies that the cabinet very much wants to broadcast its displeasure, even if it means talking to New York Times journalists.)

Further isolating Elon is one tangible step that Trump might take; investors might see it as a win-win if Elon went back to running his businesses and Trump the government. The first Trump term was quite good for stocks until COVID hit — though the stock market also made major gains under Biden.

Again, I absolutely would not encourage you to make any investment decisions based on this column. The generic advice is to invest in diversified index funds with low fees and not try to time the market. And if you thought stocks were overpriced before, there has arguably been a correction now, particularly in tech stocks. I’m just trying to gauge how Wall Street is thinking about Trump, mostly insofar as it could affect the political landscape.

And I don’t think there’s going to have infinite patience. Wall Street mostly is annoyed by politics — it thinks political events are hard to price — and it’s mostly pretty “herdy” in the sense that it relies on stylized beliefs (fairly crude heuristics) about politics that are subject to some degree of social contagion. “Trump might not be good for the country, but he’s good for corporate profits” is one stylized belief that was fairly entrenched, often accompanied by irritation with Democrats about sort of a “rich guy quartet” of topics: regulation, taxes, living conditions in places like New York and DEI. If you want more on this theme, Maria and I spoke about it on last week’s episode of Risky Business.

But Wall Street also seems to have thought that Trump was bluffing — that he wouldn’t have empowered Elon to the extent that he did (and/or that Elon wouldn’t be such a chaos agent) and that he’d back down more quickly on tariffs. Traders don’t like sizing up a situation wrong, and at first that can make them reluctant to revisit their priors. But once sentiment changes, it can change in a hurry, and a new narrative may take hold.

1. Personally, I’m a very passive trader — index funds, etc. — though I’ve gradually been increasing the share of AI-adjacent stocks in my portfolio.

2. There are a lot of left-leaning parties in Germany, so SPD is not precisely analogous to the Democrats; they traditionally have a working-class base, so the better comparison might be something more like Bernie Sanders or the Minnesota Democratic-Farmer-Labor Party.

3. Actually now, technically negative (-0.2) based on some new polls that published just as I was composing this. I’m leaving the original text preserved as we don’t want to get in the habit of updating previously published newsletters every time there’s a small change in some number we’re tracking. But it will be interesting to see if the stock market selloff or a general change in economic vibes has an effect.