Trump Trade Stalls as Iran Conflict and Tariffs Drive Inflation Fears

Exchange-traded funds positioned to benefit from the current US administration’s economic policies have sharply reversed course. Ned Davis Research’s Trump Trade Index, tracking a dozen funds tied to homebuilding, defense, and manufacturing re-shoring, has fallen approximately 16% since May.

This downturn follows a strong start to the year, when the index heavily outperformed the S&P 500. The reversal is primarily driven by the ongoing US conflict with Iran, which has elevated energy prices, inflation expectations, interest rates, and the US dollar.

Market strategists warn that continuous geopolitical and trade disruptions are derailing cyclical investment themes. Pat Tschosik, chief thematic strategist at Ned Davis Research, noted that the situation is inextricably linked to the conflict and inflation, questioning whether markets can endure three consecutive months without a supply shock from tariffs, war, or supply chain disruptions.

Several funds that posted double-digit gains in the first quarter have now flipped into negative territory for the year. The VanEck Rare Earth and Strategic Metals ETF, Global X Uranium ETF, and Global X Defense Tech ETF all surged at least 20% earlier in the year before surrendering those advances.

The rotation highlights a broader shift in investor preference toward artificial intelligence themes at the expense of traditional industrial sectors. Matt Gertken, chief geopolitical strategist at BCA Research Inc., observed that investors betting against cyclical sectors outperformed those who viewed the president as a champion of US manufacturing and heavy industry.

Capital is steadily exiting some of the most prominent politically themed funds. The Truth Social God Bless America ETF, trading under the ticker YALL, has recorded consistent monthly outflows since the conflict began, dropping more than 4% this year while the S&P 500 climbed roughly 8%.

Not all politically aligned funds are struggling. The Point Bridge America First ETF, ticker MAGA, has remained positive for the year, aided by its heavy weighting in energy stocks that have benefited from the same geopolitical tensions hurting other sectors.

Policy Uncertainty and New Tariffs

Beyond geopolitics, investors are struggling to price in erratic policy implementation. Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, stated that investors are increasingly shutting out these policies because the constant shifts involving wars and tariffs make them nearly impossible to handicap.

This uncertainty was compounded this week when the administration replaced an expired temporary 10% global tariff with targeted actions under Section 338 of the Tariff Act of 1930. The move included imposing 50% tariffs on Canadian goods such as beer, wine, paper, and hockey sticks, with China and Europe viewed as the next likely targets.

Strategists advise caution as corporate margin expansion faces headwinds from elevated oil prices and inflation. Mark Malek, chief investment officer at Muriel Siebert, warned that the market has already rallied despite the Strait of Hormuz being shut, effectively using up its primary buffer against further geopolitical escalation.

Despite the recent underperformance, some proponents argue that abandoning the strategy prematurely would be a mistake. Hal Lambert, founder of Point Bridge Capital, maintained that the administration’s policies remain a long-term play, noting that building new manufacturing facilities cannot be accomplished overnight.