Wall Street games out how to profit from tariff chaos
As trade worries bubble up once again in U.S. markets, some on Wall Street are gaming out how to take advantage of the wild tariff-related selloffs and rallies that have defined the first five months of 2025.
A study by Nomura strategist Charlie McElligott published last week showed that betting against S&P 500 futures every time President Donald Trump escalated trade rhetoric and buying them five days later would have yielded 12% since the beginning of February. By contrast, simply holding the benchmark index would have left an investor virtually flat in that period – after a series of stomach-churning stock swings. Other investors have worked out similar plays, based on the notion that the pattern of escalation and resolution that has thus far characterized the trade war will continue.
Those theories may be put to the test soon enough. With the S&P 500 coming off a searing rally, Trump is rattling the tariff saber once again: A 50% increase in steel and aluminum levies announced last week is set to take effect on Wednesday, while the U.S. and China have traded accusations that each has violated the terms of last month’s broad agreement that saw both sides reduce tariffs from astronomical highs.
The S&P 500 “is probably at the top end of its range,” said Gareth Ryan, founder and managing director of investment firm IUR Capital, who has taken bearish positions on the SPDR S&P 500 Trust exchange-traded fund as trade tensions between the U.S. and China recently heated up.
The pattern is that “you get really bad tariff headlines, the headlines get walked back and that kind of brings vol back in,” said Stuart Kaiser, head of U.S. equity trading strategy at Citigroup Inc.
Stocks swept into the year on a wave of optimism sparked by hopes that a second Trump presidency would stoke growth by easing regulations and cutting taxes, taking the S&P 500 to an all-time high in February. But signs that Trump intended to first tackle tariffs – another key part of his policy platform – quickly cooled investors’ fervor.
By mid-March, the index was in a correction, often defined as a fall of 10% or more from its high, after Trump announced tariffs on Mexico, Canada and China. Stocks bounced after Trump paused or mitigated some of those levies, but the rebound would be short-lived: Trump’s April 2 tariff announcement against virtually all U.S. trading partners would take the benchmark index to the brink of a bear market.
Steely nerved traders who dove in at that time were rewarded with a 20% rally to current levels on signs that the final levies would be less severe than feared.
As a result of that roller-coaster ride, investors are now poised to react to any jump in volatility by assuming things will quickly calm, according to Kaiser.
“Every time the VIX spikes, we actually see people want to fade it, not chase it,” he said.
Of course, there’s the possibility that tariff-related market swings will become less severe, as investors become accustomed to tariff rhetoric and turn their attention to other factors. Indeed, the S&P 500 seems to be taking Trump’s latest tariff salvos in stride, with the index off some 3.4% from its recent high.
That’s also visible in the options markets, where bets are not reflecting extremes in either bullish or bearish sentiment at the moment, said Joe Mazzola, head trading & derivatives strategist at Charles Schwab.
Trump’s tariff announcements don’t have “the same shock value,” he said. “You’re just not seeing those big moves right now.”