While many Wall Street strategists celebrated former President Donald Trump's election victory and predicted another strong year for U.S. stocks, J.P. Morgan’s Michael Cembalest took a more cautious stance.
While some analysts believed Trump’s tariff threats were merely a negotiating tactic and urged investors to focus on his pro-growth policies, Cembalest—chairman of market and investment strategy for J.P. Morgan’s asset and wealth management division—advised a more wary approach. He argued that taking Trump at his word was the more prudent strategy, warning that investors who ignored the risks could suffer unintended consequences.
In his 2025 market outlook, Cembalest cautioned that Trump’s tariffs or other policies could trigger market turbulence, leading to a potential stock market correction of 10% to 15% at some point during the year. “They are going to break something, I just don’t know what yet,” he wrote in his early January report.
Just a few months later, Cembalest’s skepticism proved well-founded. Market volatility arrived sooner than expected, aligning with his predictions. However, rather than taking a victory lap, he used his latest report, published Wednesday, to emphasize a key point—neither the president nor any government official has ultimate control over the stock market.
“The stock market cannot be indicted, arrested, or deported; it cannot be intimidated, threatened, or bullied; it has no gender, ethnicity, or religion; it cannot be fired, furloughed, or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized, or invaded,” Cembalest wrote. “It is the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation, and the rule of law.”
Cembalest acknowledged that it may take time for the administration’s pro-market policies—such as deregulation and tax cuts—to influence investor sentiment. However, if stocks continue their decline, he suggested it might be worth considering reinvestment once the S&P 500 falls between 12% and 15% from its February 19 peak.
On Thursday, the S&P 500 officially entered correction territory for the first time since late 2023, meaning it had fallen at least 10% from its previous high. Although the market rebounded on Friday, the S&P 500 still experienced its sharpest four-week decline since October 2022.
Treasury Secretary Scott Bessent has described the recent economic downturn as a necessary “detox” before Trump’s policies can yield long-term benefits. However, Cembalest expressed doubts about the administration’s ability to navigate economic challenges effectively.
One point of concern is Trump’s push to establish a strategic cryptocurrency reserve, which some view as a reward for the crypto industry’s vocal support during his campaign. Additionally, Cembalest questioned Trump’s commitment to revitalizing U.S. manufacturing, pointing out that the administration has undermined the Biden-era CHIPS Act, a key policy intended to boost domestic semiconductor production.
Drawing a historical parallel, Cembalest referenced Trump’s admiration for President William McKinley, whose tariff policies initially garnered public approval but soon triggered inflation. This contributed to a Republican defeat in the 1890 midterm elections—a cautionary tale for the current administration.
Cembalest also challenged Trump’s claims about a supposed $200 billion annual U.S. subsidy to the Canadian economy. After adjusting for energy imports, the U.S. actually runs a trade surplus with Canada. Furthermore, the U.S. relies on Canada for crucial imports such as zinc, tellurium, nickel, and vanadium—materials essential for various industries.
Although some economic indicators remain stable, others have begun signaling potential trouble ahead. Small businesses have scaled back capital spending plans, consumer inflation expectations have surged, and the Institute for Supply Management’s measure of new orders versus inventories has slipped into negative territory. According to Cembalest, these warning signs suggest the U.S. economy may be heading toward a contraction.
The potential impact of tariffs on the auto industry in Canada and Mexico remains uncertain, but global auto tariffs are already causing challenges for the sector. Production and employment have weakened, and Cembalest sees little reason to believe conditions will improve once the tariffs take effect.
Reflecting on past protectionist policies, he pointed out that U.S. steel industry productivity declined after Trump imposed tariffs on imported steel in 2018, with only a minor uptick in production. Similarly, Trump’s 2018 tariffs on washing machines led to higher prices for American consumers. One study found that these tariffs cost the public approximately $817,000 per job created.
Despite recent turbulence, U.S. stocks managed a rebound on Friday. The S&P 500 gained 2.1%, closing at 5,638.94. The Nasdaq Composite climbed 2.6% to 17,754, while the Dow Jones Industrial Average rose 674.62 points, or 1.7%, finishing at 41,488.19.
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