Trump’s Tax Pitch, Tariffs, and the Tug-of-War Between Retail and Institutional Investors
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As the U.S. presidential race intensifies, Donald Trump has turned his attention to courting working-class voters by proposing new tax reforms. A key part of his messaging is eliminating taxes on tips and overtime — a move likely to resonate with workers in service sectors such as restaurants and hotels. Meanwhile, Republicans are moving forward with a broad tax cut package. While markets have responded positively in the short term, the long-term costs will eventually demand fiscal austerity or higher taxes to balance the equation.
This raises a fundamental question: Are Trump’s tariffs meant to generate government revenue — a form of indirect taxation — or are they tools to renegotiate global trade deals in favor of U.S. exports?
Two plausible scenarios emerge:
1. If tariffs are intended for trade deal renegotiation:
Eventually, the tariffs may be reduced or eliminated, allowing markets to resume growth. In this case, multinational corporations — such as Apple and Microsoft — stand to gain the most. Consider Meta (formerly Facebook), whose business model heavily relies on advertising, with over 97% of revenue derived from ads. Notably, more than 10% of Meta’s ad revenue comes from Chinese advertisers. That makes current U.S. tariffs particularly significant.
2. If tariffs are a revenue strategy:
Tariffs may become a long-term fixture, possibly maintaining a baseline rate of 10%. This approach risks sparking retaliation from other nations — leading to higher tariffs on U.S. goods, a riskier investment climate, and potential damage to stock markets.
In the short term, importers face tough decisions: Should they stock up now while the tariff rate stands at 30%, or wait in hopes of future relief — or even a rollback? Markets no longer rely on political statements. Investors want concrete action and binding agreements.
Trump’s framing of tariffs as a revenue source raises further doubts about their temporary nature. If tariffs are here to stay, America’s trade partners may become less inclined to negotiate reciprocal reductions. For now, uncertainty prevails, and no formal agreement is in sight.
Retail vs. Institutional Investors: A Growing Divergence
An unusual divergence is currently playing out between retail investors and institutional fund managers. While individual investors continue buying heavily into the rally, fund managers remain cautious. In fact, allocation to U.S. equities among fund managers has dropped to its lowest level since May 2023.
Retail investors have enjoyed strong returns over the past quarter by riding the bullish wave. However, institutional investors are still concerned about macroeconomic risks: persistent inflation, high interest rates, rising government debt, geopolitical trade tensions, and weakening demand for U.S. Treasury bonds.
Short-term vs. long-term dynamics:
In the short term, retail enthusiasm can push the market higher. But in the long term, institutional investors usually outperform due to stronger fundamentals, better risk control, and superior liquidity management. The current divergence could signal the late stage of a short-term rally — one where seasoned professionals are exiting and only emotional, last-minute buyers remain.
On the other hand, if economic data and policy signals — such as rate cuts or new trade deals — continue to improve, retail investors might end up being right.
Nonetheless, a retail-driven rally without institutional backing rarely sustains momentum. Markets are looking for solid justifications to continue climbing, and in the absence of supporting data, a correction may follow. For now, the combination of institutional risk aversion and retail optimism has created a dangerous — yet fascinating — gap in the market.
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