Investors Come Around to Trump's Uncertainty

Doubt Over Donald Trump's Commitment to Europe Led the EU to Permit Extra Borrowing for Defense

- James Mackintosh

Uncertainty is usually the enemy of investment. This year not so much. Twin uncertainties about tariffs and whether President Trump will honor U.S. security guarantees have prompted governments and companies to pour money into defending themselves, helping stocks. For now.

The biggest change is geopolitics. Doubt over Trump's commitment to protecting Europe led the European Commission to permit extra borrowing for defense, with Germany adding 500 billion euros, equivalent to $588 billion, for infrastructure on top of boosting military spending by more than 1% of gross domestic product. Far from hurting stocks, investors were delighted that Europe in general and Germany in particular are pouring government money into the economy, and share prices soared in anticipation of fat profits ahead.

"We might look back and say the geopolitical uncertainty was what Europe really needed to get their act together," said Vincenzo Vedda, chief investment officer at Germany's DWS.

Markets are anticipating big improvements in Europe, led by defense stocks. The Stoxx aerospace and defense index has just had its best six months ever, leaping 54% in the first half of the year—and 74% in dollar terms.

In the U.S., meanwhile, the impact of tariffs was blunted or delayed, or both, as companies stocked up on imports before the extra taxes were imposed. As a result, inflation has been under control and close to target, coming in below forecasts in both April and May. After an initial nasty selloff when the biggest tariffs were announced, stocks have fully recovered, helped by Trump's delay to most tariffs and a few trade deals.