The optimism in the markets at the beginning of the year has diminished due to concerns over the US deficit and slow Congressional action. The concept known as the “Trump put,” referring to the previous administration’s focus on maintaining high stock markets, appears weakened as recent cabinet discussions suggest a shift in priorities.
Since February, the S&P 500 has dropped by 10%. The current administration inherits high stock valuations and a significant deficit, which complicates economic strategies. Although there was some potential for interest rate cuts, recent comments from Federal Reserve officials indicate rising uncertainty.
Market Response To Inflation Pressures
Recent inflation numbers have come in higher than anticipated, further complicating the possibility of rate cuts. The current economic climate, influenced by policies such as tariffs, presents challenges for stock market performance, suggesting further declines may be possible.
What we’ve seen here is a clear change in tone across the markets, most noticeably since the highs earlier this year. The early year buoyancy has faded, replaced instead by concern around the growing fiscal shortfall in the United States and frustration at legislative delays in Washington. The earlier assumption—that policy would remain market-friendly as it had been in past years—no longer carries the same weight. Investors who banked on the idea of a consistently supportive federal stance are now confronting a world where that assurance seems less reliable.
The reference to the “Trump put” highlights an era when policy measures were often aimed at cushioning equity markets during stress. But recent discussions suggest those goals no longer receive the same emphasis. There’s now a more ambivalent tone coming from key cabinet figures, which undermines confidence in any assumption that equity markets will enjoy the same degree of policy protection as before.
Since February, American equities—specifically the S&P 500—have given up a tenth of their value. That drop reflects more than temporary nervousness. It indicates a broader revaluation of risks, particularly when considering that the indices began the year already priced at levels not easily maintained through uncertain policy guidance.
Challenges Facing Economic Strategy
On the economic front, the high budget deficit adds another layer of complication. It narrows the set of options available when addressing market challenges or responding to external shocks. In the past, rate cuts might have provided a soft cushion, but we now have mixed signals. Comments from central bank officials have muddied expectations. Officials like Waller and Bostic have made clear that more evidence is needed before any confident decisions can be made, and that includes data which supports the idea that inflation is truly under control.
Unfortunately, recent figures show inflation has ticked up again. It’s not just a little above target—it’s clearly outpacing projections. That shifts the calculus in rate decisions, making cuts harder to justify in the short term. From our position, that reduces the potential for an early policy boost to the equity market.
On top of that, tariffs and broader trade measures continue to affect companies’ price pressures, which flow through into results and guidance. It’s not a surprise, then, that forward expectations for earnings—in many sectors—have needed to come down.
For those of us focused on futures and options, what matters now is not just the path of rates, but the timing of any pivot. Implied volatility has not yet fully aligned with the level of macro uncertainty we are now facing. There’s a disconnect between what’s priced in and what asset prices could actually experience if inflation stays sticky and growth expectations start to dip.
In the coming weeks, pricing models will need to further adjust. We should look out for more gamma-hedging flows, which could exaggerate intra-day moves. Also, skew levels in index options remain benign given the backdrop—suggesting protection is still relatively cheap for those looking to manage downside risk. This might not last.
It’s a moment to be alert. Repricing takes time, but it often comes fast once it starts. We plan to monitor incoming data releases closely, especially CPI and PCE, alongside Fed speakers. Auction demand can also give hints at sentiment regarding deficits.
In short, market conditions are becoming more directional and less range-bound. We’re preparing for wider swings and rethinking which hedges make sense, especially as the term structure of volatility begins to steepen again.
