Following news that the U.S. may reduce tariffs on Chinese imports, global investors responded with a surge into U.S. equities, bonds, and the dollar. This optimism, however, may be premature as deeper anxieties about unpredictable economic policies and the Federal Reserve’s independence continue to threaten confidence in U.S. assets.

While much attention has focused on the possibility of capital flight from U.S. Treasurys, the stock market appears more vulnerable. Foreign ownership of U.S. equities has ballooned from $3.8 trillion in 2011 to $18.6 trillion today, making overseas investment a critical support for equity valuations. In contrast, foreign holdings of Treasurys have declined as a share of the market, with bond investments primarily acting as stable, low-return ballast. This dynamic means that while bond prices are anchored by interest rates and central bank policies, stock prices are more sensitive to shifts in investor sentiment and foreign buying patterns.

The broader concern is that even with tariff reductions, the underlying distrust of U.S. economic direction—exemplified by fears of a dollar crash or a government default—could push international investors to apply a lasting risk premium to U.S. assets. This would challenge the sustainability of current equity valuations and potentially lead to more volatile capital flows. Understanding this evolving dynamic is essential as foreign investment remains a cornerstone of U.S. market strength.