Despite assurances from the White House that inflation remains subdued, anxiety is rising among both consumers and investors as the second wave of tariffs under President Trump’s administration begins to ripple through the U.S. economy. With retail sales falling for the second consecutive month in May and companies warning of future price increases, investors are now navigating not only economic headwinds—but emotional ones as well.
While early warnings from economists about skyrocketing prices have not yet materialized, the market’s underlying mood is increasingly fragile. Federal Reserve Chair Jerome Powell noted last week that tariff-driven inflation could emerge later this summer, once pre-tariff inventory is depleted. Retailers like Walmart and Costco have acknowledged plans to raise prices on select goods, and new car prices have already begun to inch up in specific categories. According to Fitch Ratings, the effective tariff rate on U.S. imports has surged to 14.1% in 2025, up from just 2.3% last year.
But beneath the headline inflation figures lies a quieter threat to financial markets: investor sentiment. Emotional volatility among retail investors—heightened by economic uncertainty and inconsistent policy messaging—is distorting how individuals engage with the market. Recent data from DALBAR shows that the average investor underperformed the S&P 500 by 4.7% in 2023, largely due to poorly timed trades driven by fear and reactionary behavior.
“Even with inflation numbers below expectations, you’re seeing retail pullback—because perception, not reality, drives behavior,” said a market strategist at a leading investment research firm. “People are spooked not just by prices, but by the idea of what’s coming next.”
That perception gap is being widened by the unpredictable nature of the current economic cycle. While the administration celebrates early signs of price stability, most mainstream economists—including those at JPMorgan and Goldman Sachs—expect consumer price growth to accelerate later in the year. Already, business leaders have reported inventory contraction and a spike in prices paid, suggesting future pricing pressures may be unavoidable.
Against this backdrop, some are rethinking the role of gut instinct in investing. For decades, investors—particularly in the retail segment—have leaned heavily on intuition, timing, and news-cycle sentiment to make decisions. Yet market history shows that emotional investing can be self-defeating. This year’s volatility, driven as much by political developments as economic ones, has only amplified that dynamic.
“People love to glorify gut instinct in the market, but instincts are just bias wearing a confident face,” said George Kailas, founder and CEO of Prospero.AI, a data-driven investment platform. “Machine learning doesn’t care about headlines, hunches or hype—it simply analyzes millions of data points in real time to find statistical relationships at scales the human brain cannot comprehend.”
While Kailas isn’t alone in his belief that data-driven investing could help mitigate emotional missteps, his caution is especially timely. The widening use of AI in financial tools has made sophisticated analysis more accessible to everyday investors. Platforms like Prospero.AI are designed to help retail investors detect institutional trading patterns and filter out noise, offering a more stable path through uncertain times.
But technology alone isn’t enough to solve the behavioral challenge. Experts argue that without discipline and long-term perspective, even the best tools can be misused. “What we’re facing isn’t a lack of information—it’s an abundance of emotion,” said a behavioral finance professor at the University of Chicago. “And right now, the noise is louder than the numbers.”
Looking ahead, the confluence of policy uncertainty, tariff-driven supply chain adjustments, and rising investor stress creates a high-stakes environment for market participants. With expectations of rising prices later this year, small businesses and consumers alike may be forced to make tough financial decisions—further feeding the emotional undercurrents already influencing investor behavior.
As the summer progresses, economists and investors alike will be watching for the long-anticipated tipping point. Whether it’s a gradual drift or a sudden break, emotional resilience may prove just as critical as economic indicators in determining how retail portfolios weather the storm.
In a market built on confidence, fear has become a quiet but powerful driver—and increasingly, the smartest investors are those learning to tune it out.