‘A highly unpredictable U.S. president’ is prompting Wall Street to exit U.S. stocks

President Trump’s trade policies are rattling asset managers, with some stepping back from the most volatile corners of the U.S. stock market entirely.

In a recent note, National Bank analysts say they’re cutting down U.S. stocks and pulling out of small caps altogether, citing waning confidence that they will outperform in the short run.

“Although these stocks still offer attractive upside potential, it has become increasingly clear that for this to happen, we need greater visibility on the cyclical backdrop, which is currently threatened by U.S. tariffs,” they wrote.

The unpredictability of Trump’s tariff threats has made it difficult for investors to separate real risks from political posturing.

“In just a few weeks, 25% tariffs on Canada and Mexico have been announced, postponed, announced again—and now we await the next move,” the National Bank analysts noted.

They added that while “the so-called stock market fear index—the VIX—remains relatively low,” it may suggest investors “have become less prone to panic” after already experiencing one Trump presidency.

But Mandy Xu, vice president and global head of derivatives at CBOE, believes the stock market has been underestimating Trump’s tariff risks.

She told CNBC’s Fast Money on Monday that the bond market has been more sensitive to economic uncertainty than the stock market, but that gap may be starting to close.

“There’s scope for [volatility] to go even higher because the way the options market is still pricing tariffs is as a stock-specific catalyst, not as a macro catalyst,” Xu said.

In other words, the bond market is pointing to a tariff-induced shock that could lead to a potential recession. “And that, as we know, is bad for all stocks,” Xu added.

Uncertainty calls for diversification

Even though the economy is still holding up relatively well, National Bank analysts say economic policy uncertainty is at an all-time high.

“Overall, the economic backdrop remains fairly constructive but highly fragile and uncertain, with the Trump administration's policies—and their true consequences for the economy—set to become clearer in the coming months,” they wrote.

That uncertainty was reflected in this week’s market swings.

The Nasdaq flirted with correction territory on Tuesday before recovering to close down 0.35%. The Dow plunged 800 points in early trading before rebounding, only to drop another 670 points later in the day.

Meanwhile, the S&P 500 erased all gains made since Trump’s election in November, turning negative for the year on Monday.

“In these circumstances, we believe now is not the time for high-concentration strategies. We encourage investors to focus on diversification rather than trying to take a position based on a highly unpredictable U.S. president,” the National Bank analysts concluded.

The CBOE Volatility Index jumped from 16% to 22.78% on Monday and stood at 21.93% on Wednesday.