July has been another fantastic month for the S&P/ASX 200 Index (ASX: XJO) and many ASX 200 shares. Since the start of the month, the ASX 200 has added 1.82% to its value.
Not only that, but the index has hit a few new all-time record highs during this month. Most recently, the index clocked a new high watermark of 8,776.4 points back on 18 July. Today, the ASX 200 is sitting below that high, but is still at a healthy 8,697.7 points at the time of writing, up 0.36% for the day thus far.
July has also seen other international markets climb to record highs, most notably those of the United States. The US markets have hit a series of new records this month, with the flagship S&P 500 Index (SP: .INX) topping out at 6,395.92 points just last Friday.
As such, it's fair to say that optimism is reigning supreme across global markets right now. Investors appear convinced that inflation has been tamed, interest rates are coming down, and the economic outlook remains rosy.
Now, this may be true.
But it could also be overly optimistic.
The trade policies of the United States, in particular, represent a clear threat to the future growth of the economy. The Trump Administration has been barrelling ahead with implementing new tariff policies over this month after a twice-extended deadline from the original 'Liberation Day' tariff announcements that we initially saw on 1 April.
Image source: Getty Images
The ASX 200's future might rest on the United States
The world hasn't seen the kinds of trade barriers that the US is presently erecting around its economy for decades. Indeed, in a lifetime.
With almost every import into the US subject to at least a 10% levy right now, and with many goods attracting more than that (to illustrate, most imports from China are now subject to a 30% tariff), we are in territory that hasn't been chartered in almost a century.
Economists have warned that these tariffs could stoke inflation whilst throttling growth in the US economy. We haven't seen too much evidence that this is occurring. But it's still early days. And the latest economic statistics out of the US haven't exactly been encouraging.
Here's some of what our own Reserve Bank of Australia (RBA) said in its July minutes this month:
The central case remained for US inflation to increase and output growth to slow in the second half of 2025 as inventories are run down and firms' capacity to absorb higher tariffs diminishes.
As I wrote earlier this month, if interest rates in Australia continue to fall, and economic growth across the globe stays in positive territory, we could well see the ASX 200 hit 9,000 points by the end of this year. But if the RBA's 'central case' proves to be accurate and we see clear signs that the US economy is slowing and inflation is ticking up, it could give the markets a bit of a nasty shock.
Remember, there is only good news being baked in by investors right now, both here on the ASX and overseas. If the RBA is to be believed, this might be a big mistake. But we'll have to wait and see.
