European companies that sell to their local markets are in a particularly strong position, in part because they are less exposed to foreign-currency fluctuations, Bell says. “Domestic companies don’t have that dollar exposure, they have underperformed for a long period of time, and they are trading at a deeper discount,” she says.

Our economists expect the euro area economy to grow slowly this year — they forecast that the rate of real GDP growth at the end of 2025 will be just 0.9% (as of May 16). But Bell points out that the outlook for Europe’s economy looks set to improve in 2026 and beyond.

This improving outlook is partly down to policy, Bell adds. “Fiscal policy, defense policy, and ultimately rate cuts by the European Central Bank are all helping to drive slightly better growth in 2026 and 2027 as well,” she says.

Will European stocks outperform those in the US?

In the last 15 years, large European companies have pivoted toward the American market. The proportion of STOXX 600 companies’ assets that are in the US has increased from 18% in 2013 to 30% in 2025, while around a quarter of STOXX 600 companies’ sales now come from the US.

“That’s a lot of dollar exposure,” Bell says. “What does all this mean for our strategy? We think this means we’ll see a little bit more diversification away from dollar exposure,” which could benefit European assets, she adds.

A new acronym is popping up on Wall Street to explain investors’ reaction to President Trump’s on-again, off-again tariffs: TACO.

Coined by Financial Times journalist Robert Armstrong in a May 2 column, the tongue-in-cheek term stands for “Trump Always Chickens Out.” That phrase is meant to describe a pattern of stocks plunging when the Trump administration announces stiff new tariffs, then surging when Mr. Trump eases up on them days or weeks later.

Since Armstrong’s column, Mr. Trump has pulled back on import duties on two other major U.S. trading partners. On May 12, he placed a 90-day freeze on 145% tariffs on Chinese goods, while on May 26 he delayed 50% tariffs on European goods until July. In both cases, the markets jumped after Mr. Trump offered to ease tariffs.

“[T]he recent rally has a lot to do with markets realizing that the U.S. administration does not have a very high tolerance for market and economic pressure, and will be quick to back off when tariffs cause pain. This is the TACO theory: Trump Always Chickens Out,” Armstrong wrote on May 2.

In the most recent case, the market dropped sharply on Friday after Mr. Trump said he planned to hike tariffs on European imports to 50%. But on Memorial Day, Mr. Trump said he would ease up on those plans until July to give the European Union and the U.S. more time to negotiate. On Tuesday, the day U.S. markets reopened after the holiday, the S&P 500 rallied 2.1%.

When asked about the term by a reporter at the White House on Wednesday, Mr. Trump responded that it was a “nasty question.”

“It’s called negotiation,” Mr. Trump said. “They wouldn’t be over here today negotiating if I didn’t put a 50% tariff” on Europe.

He added, “[T]hey’ll say, oh, he was chicken. He was chicken. That’s unbelievable. I usually have the opposite problem. They say, ‘You’re too tough, Mr. President.'”

Whatever the strategy at the White House, investors are becoming more comfortable with the Trump administration’s pattern of initially setting high tariff rates that it later reduces, noted Vital Knowledge analyst Adam Crisafulli.

“[T]he narrative is growing increasingly bullish as investors become more comfortable with the severity of the tariff threat (the “TACO” mindset is being embraced by more people) while companies demonstrate an ability to absorb the import tax hike relatively well (the hit to [earnings per share] hasn’t been as draconian as feared),” Crisafulli wrote in a May 28 research note.

Still, there may be too much complacency in the market about the threat of Mr. Trump’s tariffs, which major businesses like Walmart have warned will cause them to hike prices, as well as the wobbly fiscal outlook for the U.S., Crisafulli added. Earlier this month, Moody’s downgraded the U.S. credit rating, highlighting investor concerns about the government’s growing debt.

“That said, the tariff narrative could stay in a state of benign optimism for the next several weeks (the big deadline is early/mid-July, when the 90-day reciprocal tariff/50% EU tariff suspensions expires) while tariff-driven inflation may not appear in the data until July (when the June numbers are reported),” the analyst noted.

Donald Trump has historically bad poll numbers for a president through the first 100 days in office, but the White House’s 2026 midterms strategy will run through Trump himself while trying to re-create the energy behind his 2024 campaign.

Republicans and top White House advisers generally believe the midterm maps are favorable to them in the Senate but more up in the air on the House side. But Trump’s lagging poll numbers — and what has become an unpopular, tariff-dominated economic policy, at least for now — have some Republicans concerned that both chambers could be at risk.

The 2026 goal, according to nearly a dozen Republican operatives and Trump advisers NBC News interviewed, is to try to overcome negative economic sentiment by rekindling the energy Trump brings when he is on the ballot — a needed boost for the party after Democrats have outpaced Republicans in recent special congressional and state-level elections.

House and Senate leaders are already in close consultation with the White House about key candidates who would benefit from Trump’s endorsement, both to navigate primaries and to gin up general election support. His political operation is banking millions of dollars in explicitly Trump-aligned political groups that will play heavily in the midterms alongside Republicans’ party committees and principal congressional super PACs. And then, top Republicans expect the rest of the party to lean into Trump’s message to make the best possible pitch to his supporters to vote in 2026.

“The push needs to be to push that energy. In some states his endorsement will be very beneficial, and it’s up to candidates to try and replicate his messaging to spur turnout,” said Rachel Reisner, a longtime Republican operative who worked for Trump’s 2024 campaign.

Reisner added that some of the most intense Trump voters who support him in presidential election cycles do not always show up in nonpresidential races, something that has been amplified in recent special elections, most notably a Supreme Court race in Wisconsin, where Democrats overperformed compared with the political makeup of the districts in play. She said getting those voters to get engaged as though Trump is on the ballot will be a key push for Republicans next year.

“We clearly know a motivated, angry liberal is likely to turn out to vote,” Reisner said. “We can’t get too full of ourselves or think we have the perfect messaging. There are some center-right voters who voted for President Trump who said, ‘Of course we will win,’ but we need to make sure those people turn out.”

Shaping the issues and the candidates on the field

Much of the dynamic as the midterm election takes shape will be about immigration policy versus economic policy.

Trump’s handling of immigration, which has led to a significant reduction of border crossings at the southern border, has generally gotten higher marks from voters, and the White House is eager to talk that up. But his decision to impose tariffs on most of the world has sent shock waves through the financial markets and has had political ripple effects that could erode Republican confidence if, as promised, the administration does not cut a series of trade deals in the very near future.

“The president’s economic policies have been disastrous with this tariff play, right?” said a longtime prominent Republican donor. “It’s disastrous. I think it does put the Senate in play. I mean, I think it puts a ton of pressure on the House.

“If they don’t announce some deals, and, I mean, like, in the next two weeks, I think they’re going to have real problems,” the person added.

Yet Republicans do have serious opportunities in the Senate, which Democrats could flip by netting four seats. Sen. Jon Ossoff, D-Ga., is a top target, and the GOP is trying to flip open seats held by retiring Democrats in Michigan, New Hampshire and Minnesota. Meanwhile, the only Republican senators who appear in danger are Maine’s Susan Collins and North Carolina’s Thom Tillis.

Before he won it last year, Georgia had been a problem area for Trump, marked by Ossoff’s and Sen. Raphael Warnock’s runoff victories in January 2021 and a failed attempt to defeat GOP Gov. Brian Kemp in a primary.

But one Trump adviser, who was granted anonymity to speak candidly, said Trump would back Kemp if he were to challenge Ossoff, as Republican leaders would like, despite the past tension.

“No doubt, he would endorse Kemp,” the person said.

Trump plans to endorse in both Senate and House primaries ahead of the midterms, including “in competitive seats,” the White House adviser said, with special attention on how incumbents vote on Trump’s legislative priorities this year.

So far, there has been some delay between Senate GOP leaders’ endorsements in key races and Trump’s chiming in. Both Tim Scott, of South Carolina, the chair of the National Republican Senatorial Committee, and Majority Leader John Thune, of South Dakota, have backed former Rep. Mike Rogers’ Senate bid in Michigan while other Republicans consider running. They have also backed Sen. John Cornyn’s re-election run in Texas, where he will face a primary fight against state Attorney General Ken Paxton. Trump has not endorsed yet in either race.

The Trump adviser said his lack of immediate endorsement in those races should not be interpreted as a sign of distance between him and Senate GOP leaders, who talked to him before they made the early endorsements.

“I would tell you they would not be moving so aggressively without some directionality,” the adviser said. “The president is probably leaning towards Mike [Rogers].”

A person familiar with the NRSC’s thinking said no endorsement decisions are made without “making sure the White House is aware of what’s going on.”

There is some tension between the White House and Scott, who ran against Trump in 2023 before he dropped out of the GOP race and later endorsed him. Some of the heartburn comes from Scott’s trying to hire staff members perceived as having worked for groups that previously opposed Trump.

The Trump adviser did little to downplay the potential tension, offering a less-than-ringing endorsement for Scott’s leadership.

“I mean, he’s OK, I guess,” the person said.

Spokeswoman Joanna Rodriguez said the NRSC is on the same page with Trump.

“Republicans are working as one team with President Trump to deliver for the American people, protect and grow our Majority in 2026, and hold Senate Democrats and candidates accountable for their radical, out-of-touch priorities and dishonest fear-mongering,” she said in a statement.

Pouring pro-Trump money into the midterms

The White House does plan to deploy “our own resources” during the midterms through a series of super PACs and other vehicles, the White House adviser said, a signal that its political shop will run its own campaign strategy rather than just rely on party-aligned campaign organizations like the NRSC.

“I think [the White House] will be deploying significant resources on its own,” the adviser said. “Anyone looking for a big contribution will be disappointed. I think this will be protracted trench warfare, and we have the munitions.”

Republicans say the early midterm data is encouraging, despite Trump’s low personal polling numbers. Internal polling touted this week by the National Republican Congressional Committee found Democrats essentially tied with Republicans on a generic ballot offered to likely voters in competitive House districts. At this point in the 2018 midterm cycle, during Trump’s first administration, Democrats had a 6-point lead in that measure.

Several recent media polls have found Democrats with a slight edge in national generic ballot tests, within the margins of error. Much can also change in the year-plus before the midterm elections, but Republicans are hopeful the numbers hint at something closer to 2022, when Democrats performed better than expected in President Joe Biden’s lone midterm election (though they still narrowly lost the House).

“It’s a small map,” a House Republican strategist said. “If you look at 2024, there were 10 races that were won by 5,000 votes or less.”

A person close to the White House, who was granted anonymity to share internal thinking, noted that Trump’s polling numbers, while they are dipping, are better than they were in 2017. But this person also cautioned that outside factors — like an economic depression or escalating wars in the Middle East — could shift the trajectory.

Where to send Trump

Still, Trump remains a large draw, and this person said the biggest mistake Republicans could make would be to sideline him.

“They should want Trump anywhere and everywhere that he’s willing to go for the very simple fact that we now have empirical evidence that there’s a large group of voters who are not automatic Republican voters — they’re automatic Trump voters,” the source close to the White House said.

The House GOP strategist agreed.

“The whole end game in 2026 is to get these Trump voters out to vote again,” this person said. “It’s what we’re all trying to figure out — if we can get these presidential voters to come out and vote in the midterms. So the president is helpful. These are his voters, and we need to turn them out. And no one is better at turning out those voters than Donald J. Trump.”

Democrats need to net only three seats to flip the House, but Republicans can find hope in some of the House map battle lines. Democrats represent 13 House districts that Trump won last year, compared with only three Republicans in seats won by Kamala Harris, according to an analysis of election results by NBC News’ Decision Desk.

“This is a map where we can go on offense,” the Trump adviser said.

The person close to the White House who favors sending Trump anywhere he is willing to go was unsure how much he would want to campaign and envisioned a scenario in which Donald Trump Jr. and Vice President JD Vance would pitch in to headline rallies across the country. Vance, who is expected to run in 2028 to succeed the Trump, who is term-limited, could be boosted by a successful supporting role in the midterms. He is likely to be heavily deployed in key races, this person added.

“Between the president, the vice president and Don Jr., Republicans actually have three surrogates that can drive serious earned media anywhere they go and draw big crowds anywhere they go. Is there anyone the Democrats have that compares to that?” this person said.

Republicans also see a favorable Senate map — “just in terms of the open seats and where they are,” said Greg Manz, a Michigan-based GOP strategist who was an adviser to Trump’s 2020 campaign.

Manz saw Trump’s visit this week to Macomb County, Michigan — a swingy slice of Detroit suburbs long known for its “Reagan Democrats” — as foreshadowing for an intense focus on the state.

Trump announced new fighter jets for an endangered Air National Guard base and presided over a bipartisan event that included Gov. Gretchen Whitmer, a Democrat who could be a candidate for president in 2028, and Rep. John James, a Republican running to succeed Whitmer, who is term-limited, next year.

Michigan’s races for governor, an open U.S. Senate seat and several competitive U.S. House seats, including James’ in Macomb County, will be among the key races in the country.

“As much time as we can get him in Macomb, it will be key,” Manz said, also name-dropping Pennsylvania and New York as places with important House races where Republicans believe Trump is uniquely capable of turning out GOP votes.

There is some concern that if Democrats take the House, they could move to impeach Trump for a third time, which his political operation already has in mind. In fact, it wants to keep that notion in the headlines as a way to remind Republican voters of the stakes of the 2026 midterms.

The Trump adviser dismissed the notion of Democrats’ winning the House, despite how close the margins are. “But,” the adviser said, “this is about making sure voters remember the stakes of the midterm elections.”

How Carney’s election win will change direction of trade war

4 May 2025 Share Save Faisal Islam • @faisalislam Economics editor Share Save

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On Mark Carney’s final day of a gruelling race to be elected PM of vast and sparsely populated Canada I was with him. It was his last push, not just to win, but also to get the majority he said he needed to stand up to the chaotic territorial and trade ambitions of his “neighbour to the south”. For someone who had got to see Carney as a cerebral technocrat, a crisis-managing central bank governor a decade ago, the transformation into public orator was quite something. I recall endless interviews trying to get the then governor to say something newsworthy, or something that would make a good headline. While this was a very different Mark Carney, the lineage in crisis economics was also part of his sell. Carney told his audience in Edmonton, Alberta, sporting the local Oilers hockey shirt: “President Trump has ruptured the global economy… America’s leadership of the global economy is over. It’s still in play, but it is a tragedy, and our new reality… in this trade war, just like in hockey, we will win”. His supporters shouted “Elbows Up” and put them up, a reference to a stand up and fight back posture in the occasionally rough game of ice hockey. “What we are seeing around the country is Canadians acting on behalf of other Canadians, standing up for each other, buying from each other, travelling here…” At his very final stop in the far West, in the isolation of Victoria, Vancouver Island, with only half an hour of campaigning allowed, Carney went “unplugged” among supporters. “As the assembled media will tell you, I campaigned in prose,” Carney joked. “So I’m going to govern in econometrics,” he said of the nerdy mathematical strain of economics. In normal circumstances, some of this might be interesting to the wider world. In current circumstances, the origins of his election win, his approach to policy making, and the nature of his mandate, could assume critical importance. When I caught up with him for the BBC exclusive interview, just as the polls were closing on Monday, he appeared confident but was taking nothing for granted.

Fighting threats to sovereignty

Mr Carney’s central argument remained consistent. He said he was the leader to take on Donald Trump’s “betrayal” and threats to Canada’s economy and sovereignty. It was exemplified by his final large rally on the US-Canada border, with the Ambassador Bridge and a skyline of iconic Detroit motoring firms behind him. This bridge is the main artery of Canadian-US trade. A lot of effort went into this backdrop of the two-way trade of the most integrated economies in the world, now tariffed at unimaginable levels. An unsubtle message from the Liberal Party leader, about a changed continent. The election result was staggering. Entering 2025, the Liberal Party was as low as 16%, versus 45% for the opposition Conservatives, in opinion polls. Pierre Poilievre’s Conservatives were not just heading for victory, but for a total landslide. But then following President Trump’s imposition of national security tariffs on Canada, using the pretext of an alleged role in fentanyl traffic, and then his undiplomatic suggestion that Canada should join the USA, the polls tightened. Then after Mark Carney was elected Liberal leader, just eight weeks ago, the Liberals achieved a consistent poll lead, which they rode to victory last week. The election became a presidential-style verdict on who could cope with Trump. Poilievre was fundamentally weakened by previous overtures to the US president and his style of government. Carney incorporated voters on the left who were scared of a Conservative government amplified by Trump. And incredibly, in Quebec, the Liberals won back support from separatists, who were more concerned about Canada’s independence from the US, than their own constitutional status within Canada. There is nothing more unifying than a credible external threat.

Carney’s strategy

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Key Takeaways

• Stocks soared on Monday after the United States and China reached a temporary agreement on tariffs.

• Strategists say that while there is reason for optimism, the levies remain higher than they were at the start of the year.

• There are early signs that tariffs have already dented economic growth.

• Stocks could fall lower if negotiations don’t go smoothly.

A temporary tariff truce between the United States and China sent stocks soaring on Monday. However, strategists say levies that remain higher than they were at the start of the year still pose a threat to growth. At the same time, the uncertain path to a lasting agreement means more market volatility could be on the horizon.

Following talks in Switzerland over the weekend, the two countries reached a deal that would reduce US tariffs on Chinese goods to 30% and Chinese tariffs on US goods to 10%. Last week, a 145% US tariff on Chinese goods and a 125% Chinese tariff on US goods was threatening to bring trade between the two economic powerhouses to a standstill.

“The heat has been turned down, big time, at least over the next 90 days,” BMO Capital Markets senior economist Jennifer Lee wrote in a note to clients on Monday. “The steep tariffs had already started to negatively impact economic activity, so it is in everyone’s best interests to talk this out.”

The scaled-back tariffs took markets by surprise, with the Morningstar US Market Index rising 3.3% on Monday. “The reduction in tariffs by both countries is more than what we were looking for,” says Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute. He characterizes Monday’s market action as a relief rally.

Tariff Risks Remain Top of Mind

But even as markets celebrate, strategists say it’s too soon to put tariff concerns in the rearview mirror. For one thing, a 30% tariff on Chinese goods could still have a meaningful impact on global trade and growth. It’s equivalent to the 20% tariff Trump imposed in February plus the additional 10% universal tariff, explains Christopher. “That’s still a higher tariff than we had at the beginning of the year,” he says.

“The markets are getting very excited too early,” asserts Michael Field, Morningstar’s chief European markets strategist. “The US-China deal has 30% import taxes on Chinese goods, which could still stem trade flow.”

In a speech on Monday, Federal Reserve Governor Adriana Kugler said that even reduced tariffs could weigh on economic growth. “Trade policies are evolving and are likely to continue shifting,” she said in prepared remarks. “Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and the uncertainty associated with these tariffs has already generated effects on the economy through front-loading, sentiment, and expectations.”

And then there’s the prospect of difficult negotiations in the weeks ahead. “This is deescalation, not a trade deal,” writes Jeff Buchbinder, chief equity strategist for LPL Financial. “More work remains to be done. A pause isn’t permanent.”

Christopher believes deals that leave significant tariffs in place will slow the economy further. “So yes, relief rally today,” he says. “But how long does it last?”

Adds Lee: “Businesses on all sides are still facing higher costs than the beginning of the year, and there is still fear that if talks break down, tariffs could be pushed higher again.”

The Bottom Line for Investors

Market sentiment has improved dramatically over the past month, and stocks have recouped all the losses they incurred in the wake of the April 2 tariff announcement, and then some.

But more swings in the stock market could be on the horizon, especially if trade negotiations prove thorny. “Challenges certainly lie ahead in forging a durable agreement between the US and China, which could lead to further bouts of volatility,” writes Ulrike Hoffmann-Burchardi, chief investment officer of global equities at UBS Global Wealth Management. She adds that opportunities will remain for investors who are able to look beyond the volatility and invest selectively. She still views US stocks as attractive.

Dave Sekera, Morningstar’s chief US market strategist, points out that stocks are now trading just under Morningstar’s assessment of the market’s fair value. That means there’s less room to recover if the path forward proves bumpy. “At this point, the market is no longer providing any margin of safety if trade negotiations were to break down, require more time than 90-day deadline provides, or if finalized trade terms are so restrictive as to impair economic activity and lead to a broad earnings slowdown,” he says.

A relief rally like this (even if it’s fleeting) may also provide opportunities for investors to rebalance. Christopher advises investors to consider whether they’ve deviated from their long-term allocations. “Is there anything that you had wanted to sell, or would have wanted to sell back at the end of January, had you known that the tariffs were going to be this high?” He suggests paring back holdings in small caps and developed and emerging markets, which he expects to underperform as the year progresses. “We think that the bad economic news for international is just beginning,” he says, as tariffs begin to dent factory production in China and Europe.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.