Trump Trade War: Economic Warning Signs Grow as Tariff Challenge Escalates

Trump’s Tariff Push and the Promise of a Dividend

The debate on tariffs has resurfaced, with proposals highlighting their potential to strengthen the domestic economy. In a recent Truth Social post, President Trump claimed that tariff revenues would soon be distributed to Americans through a $2,000 payout. The proposed $2,000 payout would exclude high-income earners.

He mentioned that tariffs made the United States “the richest, most respected country in the world.” He also highlighted record stock market highs and low inflation during his tenure.

Recent statements have highlighted the idea that tariff income could play a role in reducing national debt. Some proposals also suggest it could serve as a mechanism to support broader public benefits. However, many economists note that tariffs can function as indirect taxes on consumers. By raising import prices, they may limit the effectiveness of this tool as a direct fiscal measure.

Legal Challenges and Economic Implications

The renewed defense of tariffs comes as the Supreme Court reviews the legality of broad trade measures. Some Justices questioned whether the administration had the authority to impose tariffs across multiple countries. Amy Coney Barrett and Neil Gorsuch were among those who raised concerns about the scope of existing trade laws. The court’s decision could change how future presidents use emergency powers in trade policy.

Treasury Secretary Scott Bessent defended the administration’s position, describing the tariffs as an “economic emergency.” He suggested that the proposed “tariff dividend” could take the form of future tax cuts. These may include exemptions on tips, overtime pay, and Social Security benefits.

Economic Data Paints a Contradictory Picture

While Trump emphasises economic strength, recent data tells a more fragile story. The University of Michigan’s current economic conditions index plunged to 52.3, as shown in the chart below. This is the lowest reading since 1960, and this is the level typically associated with recessions.

Despite this, financial conditions remain loose. The Chicago Fed National Financial Conditions Index increased slightly to -0.514, but still indicates ample liquidity supporting high stock valuations.

The S&P 500 (SPX) remains strong, holding near its record level despite deteriorating economic sentiment. The chart below shows that the price-to-sales ratio for S&P trades at 3.36 times sales, far above its long-term average, suggesting stretched valuations.

This gap between market optimism and consumer pessimism signals rising vulnerability. A high price-to-sales ratio combined with weak sentiment has often preceded market reversals.

Liquidity, the Fed, and Market Fragility

The chart below shows that commercial bank reserves have dropped below $3 trillion, resulting in tighter liquidity across the financial system. In response, the Federal Reserve announced it will end quantitative tightening (QT) on December 1 to prevent stress in funding markets.

Moreover, the Secured Overnight Financing Rate (SOFR) has eased slightly, showing that repo market conditions are stabilising.

However, the broader financial outlook remains uncertain. Loose monetary policy and ample liquidity continue to support elevated stock prices, masking deeper economic fragilities. As tariffs and trade tensions introduce new cost pressures, the Federal Reserve faces a difficult challenge in balancing economic growth with inflation control.

S&P 500 Faces Pullback Risk Despite Bullish Technical Signals

The S&P 500 has not experienced a significant correction since April, and investor optimism remains elevated. However, extreme valuations and weakening fundamentals indicate that the market is vulnerable to a substantial pullback. Rising tariffs may further pressure corporate margins and disrupt global supply chains, increasing volatility in equities.

However, despite the risk of a potential drop due to extreme overvaluation, the technical outlook remains supported. The chart below shows that the decline in the S&P 500 formed a bullish hammer candle at the support line. This suggests that if the index holds above 6,630, the next move could be higher.

Investors should remain cautious, as adding new positions at current levels involves significant risk. A market correction from this zone could bring valuations closer to historical norms, creating better long-term entry points. A break below 6,630 in the S&P 500 could introduce selling pressure in the US stock market.