ORLANDO, Florida, July 15 (Reuters) - The astonishing

rebound in stocks since early April largely reflects investors'

bet that U.S. President Donald Trump won't follow through on his

tariff threats.

But the market's very resilience may encourage the president

to push forward, which could be bad news for equities in both

the U.S. and Europe.

Investors appear to believe that the April 2 "reciprocal"

tariffs were mostly a tactic to bring countries to the

negotiating table, and Washington's levies will end up being

much lower than advertised. Tariffs may end up much higher than

they were before Trump's second term began, but the situation

will still be better than the worst-case scenarios initially

priced in after Trump's so-called "Liberation Day".

Monday's equity moves were a case in point. Trump's threat

on Saturday to impose 30% levies on imports from the European

Union and Mexico - two of America's largest trading partners -

was met with a collective market shrug. European and Mexican

stocks dipped a bit, but Wall Street closed in the green and the

Nasdaq hit a new high.

This follows threats in recent days to place a 50% tariff

rate on goods imported from Brazil and a 35% levy on goods from

Canada not covered under the USMCA agreement. Brazilian stocks

have slipped 5%, but Canadian stocks have hit new peaks.

The question now is whether the line between complacency and

the "TACO" trade - the bet that "Trump always chickens out" - is

getting blurred.

GETTING STRETCHED

The scale of the recovery since April 7 is truly

eye-popping. It took the S&P 500 less than three months to move

from the April bear market lows to a new all-time high, as

Charlie Bilello, chief market strategist at Creative Planning,

recently noted on X. This was the second-fastest recovery in the

last 75 years, only bested by the bear market recovery in 1982

that took less than two months.

On a 12-month forward earnings basis, the S&P 500 index is

now near its highest level in years and well above its long-term

average. The tech sector, which has propelled the rally, has

rarely been more expensive in the last quarter century either.

None of that means further gains cannot materialize, and one

could argue that the valuations are justified if AI truly

delivers the promised world-changing productivity gains.

Regardless, it is hard to argue that the rally since April

is not rooted in the belief that tariffs will be significantly

lower than the levels announced on Liberation Day.

If many countries' levies do end up around 10% like

Britain's and the aggregate rate settles around 15%, then equity

pricing might very well be reasonable. But if that's not the

case, growth forecasts will likely have to be revised a lot

lower.

"We stay overweight U.S. stocks, but don't rule out more

sharp near-term market moves. Uncertainty on who will bear

tariff costs means yet more dispersion in returns - and more

opportunity to earn alpha, or above-benchmark returns,"

BlackRock Investment Institute analysts wrote on Monday.

DOOM LOOP?

One concern is that a loop is potentially being created,

whereby Wall Street's resilience and strength in the face of

heightened trade uncertainty actually emboldens Trump to double

down on tariffs.

Most analysts still believe cooler heads will prevail,

however. Trump's tolerance for equity and bond market stress,

and therefore U.S. economic pain, appears "limited", according

to Barclays.

But if markets have gotten too complacent and Trump does

increase tariffs on EU goods to 30%, potential retaliation would

risk a repeat of something similar to the post-Liberation Day

selloff, sending European equities down by double digits,

Barclays warns.

It may also be that when it comes to tariffs, investors are

focusing so intently on China that not much else moves the dial.

This may be short-sighted though.

China accounted for 13.4% of U.S. goods imports last year,

the lowest in 20 years. In contrast, the U.S. imported $605.7

billion of goods from the European Union, or 18.6% of all

imports and the most from any single jurisdiction.

As Trump sees it, Europe is "ripping off" America almost as

much as China.

Bilateral U.S.-China trade last year totaled $582 billion,

compared with bilateral U.S.-EU trade flows of $975 billion,

U.S. Census data shows. America's $235.9 billion goods deficit

with the EU was smaller than its $295.5 billion gaps with China,

but that's still comfortably America's second-biggest trade

deficit.

If Trump doesn't back down in his standoff with Europe, Wall

Street might have to.

(The opinions expressed here are those of the author, a

columnist for Reuters)