The ‘peak Trump’ assumption is misleading—and risky

Wall Street analysts are breathing easier. In their latest midyear reports, major investment banks like Bank of America, Morgan Stanley, and Barclays suggest the worst may be over for global trade tensions. “Faster trade de-escalation” is the phrase Bank of America uses. Barclays declares, “financial markets are turning the page on trade.” There’s a sense that global markets have adapted to Trump-style disruption—and that perhaps the era of tariff tantrums is ending.

The implicit thesis is that Trump’s erratic moves are priced in, his peak disruption behind him. After all, investors weathered the “Taco trade”—the expectation that Trump talks tough but ultimately backs off economically damaging decisions. So why not treat another Trump term as more of the same? But this confidence is misplaced. It hinges on two assumptions: that Trump’s second-term behavior will mirror his first, and that the institutional buffers around policy decisions remain intact. Neither is a safe bet.

There’s a strategic error baked into the current market optimism. Analysts are framing Trump as a fading threat, forgetting that political power—especially in a second term—does not tend to shrink. It consolidates. Without the need for reelection, Trump would face fewer internal constraints, be more emboldened to act unilaterally, and operate in a more fragmented global landscape.

In fact, compared to 2016, the tools available to a U.S. president to influence trade and capital are more expansive than ever. The Biden administration has normalized outbound investment reviews, tech export controls, and friend-shoring as strategic levers. Trump could inherit these tools—and escalate them without warning.

Markets are also overly reliant on the idea that economic rationality will act as a governor on Trump’s decisions. But that assumption failed during his first term. He imposed tariffs that harmed U.S. agriculture, disrupted auto supply chains, and provoked tit-for-tat retaliation—yet stuck with them. In several cases, the political optics mattered more than the economic cost. This isn't to say all bets are off. But the belief that Trump 2.0 will be predictably unpredictable—just loud but ultimately restrained—is more hope than analysis.

The “peak Trump” theory holds that markets have already experienced the worst of his economic volatility. But history shows that second-term presidents, freed from electoral consequences, often act with more ideological intensity and personal agenda-setting.

With Trump, that effect could be amplified. Key advisors from his previous administration—those who occasionally curbed his impulses—are unlikely to return. Instead, Trump has floated a second-term cabinet of loyalists and hardliners who share his views on decoupling from China, restricting capital flows, and punishing U.S. firms that operate globally but pay taxes domestically.

And consider the international context: Trade is no longer the only arena. Strategic controls on AI chips, green technology supply chains, and cloud infrastructure are now in play. These issues are both more complex and more consequential than steel or soybeans. A single tweet from a second-term Trump could have massive implications for semiconductors, quantum R&D alliances, or rare earths.

Meanwhile, global institutions are weaker than they were in 2016. The WTO’s dispute resolution mechanism is crippled. G7 consensus on sanctions and economic alignment is shakier. And within the U.S., political polarization has deepened to the point where courts and Congress may no longer act as speed bumps to executive action.

This is not a return to the same game—it’s an escalation on a new playing field.

While investor commentary has turned rosier, the data suggests otherwise. One indicator: the CBOE Volatility Index (VIX)—often called the “fear gauge”—has already started creeping upward in 2025. Even as earnings remain strong and inflation appears manageable, the VIX has averaged 24.5 this year—higher than the Trump-era average of 18.6 and the post-COVID mean of 20.2.

This suggests the market does not fully believe the narrative of stabilization. Options pricing shows nervousness around capital movement restrictions, particularly in Asia-exposed portfolios. Meanwhile, commodity traders are building in geopolitical premiums, not removing them.

So what explains the disconnect between analyst tone and hedging behavior? Likely two things: institutional inertia and client appeasement. Bank research departments often calibrate their tone to avoid spooking large accounts. And clients themselves, chasing performance, may prefer reassuring stories—even when risk indicators flash yellow.

But narrative fragility comes at a price. If market participants are hedging privately while promoting optimism publicly, correction risks grow. It becomes a house of mirrors—until one policy move breaks the illusion.

If Wall Street is misjudging the probability of disruption, that mispricing will ripple across sectors and geographies. Emerging markets—particularly export-reliant ones—are most vulnerable. So are firms with supply chains optimized for stability, not resilience. Sectors like autos, energy, and tech could see dramatic valuation shifts if cross-border capital restrictions or sudden tariff regimes reemerge.

But there’s another danger: that this misplaced optimism emboldens policymakers. If markets stay quiet in response to early signs of aggressive trade policy, Trump (or any administration) may take that as tacit approval. As we saw in 2018–2019, markets that fail to scream early often get steamrolled later. In the near term, complacency also undermines strategic planning. Firms should be hardening their logistics, lobbying contingencies, and investment forecasts against scenario volatility. But if their financial partners are telling them “we’re turning the page,” those mitigation steps may be delayed—or skipped.

And the effects won’t be limited to U.S. firms. ASEAN trade negotiators, European exporters, and frontier market bondholders are already recalibrating their exposure to U.S. political risk. If they prepare while U.S. investors underprepare, the balance of global influence shifts subtly—but decisively—away from Wall Street. There’s a real cost to underpricing tail risk: you don’t buy insurance until the fire is already halfway through the building.

Wall Street’s belief that Trump’s capacity for disruption is waning misunderstands both the nature of political power and the global context of 2025. What markets call “priced in” is actually deferred volatility. A second-term Trump wouldn’t merely reprise his first-term playbook—he’d likely innovate on it, weaponizing new policy tools and doing so with fewer checks on his authority.

The idea that the “Taco trade” strategy—banking on Trump’s habit of bluffing—will protect investors is not a forecast. It’s a superstition. And superstitions don’t hedge risk. They mask it.

Investors and businesses should treat this moment not as the end of trade volatility, but the eye of the storm. The “peak Trump” thesis may comfort markets temporarily, but if volatility is building in the background, it will find a way to the surface. The only question is whether you’re prepared when it does.