Markets Shrug Off August 1 Tariff Deadline—But Inflation Trade Sends Early Signal — Evening Brief – 07.22.25 

With less than two weeks until the August 1 implementation of new U.S. tariffs, markets appear largely unfazed, according to a range of ETF-based asset allocation proxies. Despite warnings of price hikes on imported goods, risk-on sentiment has rebounded from April’s “tariff tantrum” and currently shows little sign of distress—though undercurrents suggest investors may be recalibrating expectations, particularly around inflation. 

The market reaction following the initial tariff announcement in April was swift and severe, with broad-based selloffs. Since then, however, asset prices have recovered steadily, and as of mid-July, the aggressive allocation ETF (AOA) versus its conservative counterpart (AOK) has returned to levels indicating bullish sentiment. Meanwhile, U.S. equity markets have regained momentum, with the SPY-to-USMV (low-volatility ETF) ratio reaching a record high, signaling investor confidence in cyclicals and higher-beta names. 

Still, the outlook isn’t uniformly bullish. U.S. stocks (VTI) continue to lag international peers, particularly those in developed (VEA) and emerging markets (VWO). Likewise, U.S. small caps (IJR) remain weak relative to large caps (SPY), a trend that suggests investors are not yet confident in the domestic economy’s breadth of strength. 

While some analysts dismiss the tariffs as merely a bargaining chip in ongoing negotiations, U.S. Commerce Secretary Howard Lutnick rejected that idea over the weekend. “That’s a hard deadline,” Lutnick said. “On August 1, the new tariff rates will come in… they’re going to start paying the tariffs on August 1.” 

This official confirmation may help explain the renewed strength in inflation-protected Treasuries (TIPS) versus nominal Treasuries (IEF). The TIP/IEF ratio has begun to climb again, albeit modestly, hinting at a reemerging reflation trade. Investors may be starting to price in tariff-induced inflation and its broader implications for monetary policy and asset allocation in the second half of the year. 

While headline market metrics suggest complacency toward the August 1 tariff deadline, beneath the surface, positioning is starting to reflect the possibility of higher inflation and macroeconomic disruption. The firmness in TIPS, combined with ongoing weakness in small caps and U.S. equities versus global peers, could be early signals that investors are quietly hedging against post-tariff dislocations—even if they haven’t blinked yet.