When Donald Trump was elected to a second term as president, amateur and professional traders alike rushed to identify which stocks would benefit from his aggressive economic policies.
While that strategy got off to a promising start, the so-called Trump Trade is now in tatters. Ned Davis Research’s Trump Trade Index — which consists of a dozen exchange-traded funds expected to benefit from White House policies on homebuilding, defense spending and the re-shoring of manufacturing — has slumped about 16% since May after clobbering the S&P 500 Index at the beginning of the year. Several of the ETFs in the gauge are now trading lower for the year.
The breakdown in the Trump Trade is mostly a result of the US conflict with Iran, which has pushed up energy prices, inflation expectations, interest rates and the value of the US dollar, Ned Davis Research wrote in a report this week.
“All this is tied to the Iran war and inflation,” said Pat Tschosik, chief thematic strategist at Ned Davis Research. “Let’s just go three months without some sort of inflation shock, right? Between some sort of tariff, or war, or supply chain disruption, could we just go three months without some sort of supply shock?”
The slide comes after many Trump Trade bets posted double-digit percentage gains through the first three months of the year. ETFs like the VanEck Rare Earth and Strategic Metals ETF, the Global X Uranium ETF and the Global X Defense Tech ETF were all up at least 20% at various points in the first quarter and held some of those gains in the second quarter before eventually flipping into the red.
Investors who bet on the success of Trump’s agenda faced several disappointments this year, according to Matt Gertken, chief geopolitical strategist at BCA Research Inc. Those include the Iran war’s negative effects on the economy, like higher inflation that hampered manufacturing and housing investment, as well as the outperformance of AI-investing themes at the expense of specific stocks whose fates are tied to the economic cycle.
“Investors who bet on AI and against traditional cyclical sectors outperformed, while those who saw Trump as a champion of US manufacturing, heavy industry and working-class consumption suffered,” Gertken said.
Fund flows point to a steady stream of investors abandoning some of the trades. The Truth Social God Bless America ETF has seen consistent outflows every month since the war began. Trading under the ticker YALL and offering outsized exposure to energy, industrials and financials, the fund has dropped more than 4% this year while the S&P 500 has climbed about 8%.
Notably, the fund does not own shares in the Truth Social owner Trump Media & Technology Group Corp., which has repeatedly hit record lows this year, though it has rallied in July. The stock is still down 35% year to date.
Not all Trump-related ETFs are under water. The Point Bridge America First ETF, which snagged the ticker MAGA, dropped less than the broad US stock market in March at the beginning of the Iran war and has remained higher for the year.
“The Iran war is causing some concern around energy prices,” said Hal Lambert, founder of Point Bridge Capital. While that has posed a challenge for the re-shoring themes in the near term, “there’s a lot of energy in the MAGA ETF” and that has helped the fund more or less match the S&P 500’s performance.
Another challenge is that investors are having an increasingly difficult time parsing the White House’s policy strategies and their eventual implementation. Since Trump was sworn in, stock investors have been forced to follow a multitude of his social-media posts and executive orders and chase potential market winners and losers tied to them, only to see the president walk back plans or otherwise change tack.
“There’s always something — the Iran war, the tariffs,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services. “It’s to the point that investors are just shutting these policies out the best they can, because they really can’t handicap them.”
The latest source of uncertainty is the Trump administration’s move this week to replace the expired, temporary 10% global tariff on goods entering the US with targeted actions under Section 338 of the Tariff Act of 1930. Trump also hit Canada, the largest single export market for the US, with 50% tariffs on a range of products this week, including beer, wine, paper and hockey sticks. Other countries are expected to see additional targeted Section 338 tariffs, with China and Europe as the next likely targets, TD Cowen analyst Chris Krueger wrote in a July 20 note.
Read More: About Section 338, Trump’s Latest Tariff Cudgel: Explainer
“Now is really not the time to be pressing this” while inflation and oil prices are elevated and investors are concerned that the corporate margin expansion could slow, said Mark Malek, chief investment officer at Muriel Siebert. “We have to be very, very careful right now.” He added that the stock market has already rallied despite the Strait of Hormuz being shut as a result of the Iran war, using up its one “get-out-of-jail card.”
Still, even though the Trump Trade appears to be on the ropes, some diehard backers of the president believe it would be a mistake to abandon it now. Point Bridge Capital’s Lambert, a longtime Republican who served on the inaugural committee for Trump, thinks the president’s policies will still create winners in the stock market.
“It’s a long-term play,” he said. “You don’t build a manufacturing facility overnight.”
This story was originally featured on Fortune.com
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