When Donald Trump won a second term as president, both retail and institutional traders moved quickly to identify which stocks would benefit from his aggressive economic agenda. That strategy showed early promise, but the so-called Trump Trade has since fallen apart.

Ned Davis Research's Trump Trade Index — comprising a dozen exchange-traded funds expected to benefit from White House policies on homebuilding, defense spending, and the re-shoring of manufacturing — has dropped approximately 16% since May, after outperforming the S&P 500 Index early in the year. Several ETFs within the gauge are now trading lower for the year.

The unraveling of the Trump Trade is primarily driven by the US conflict with Iran, which has sent energy prices, inflation expectations, interest rates, and the value of the US dollar higher, 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 decline follows a strong start to the year, when many Trump Trade bets posted double-digit percentage gains through the first quarter. ETFs such as the VanEck Rare Earth and Strategic Metals ETF, the Global X Uranium ETF, and the Global X Defense Tech ETF each rose at least 20% at various points during the first quarter and retained some of those gains into the second quarter before ultimately turning negative.

According to Matt Gertken, chief geopolitical strategist at BCA Research Inc., investors who wagered on the success of Trump's agenda have faced multiple disappointments this year. These include the Iran war's drag on the economy — particularly higher inflation that stifled manufacturing and housing investment — as well as the outperformance of AI-driven investment themes at the expense of stocks whose fortunes are tied to the broader 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 confirm a steady exodus from some of these trades. The Truth Social God Bless America ETF, trading under the ticker YALL, has experienced consistent outflows every month since the Iran war began. The fund, which offers outsized exposure to energy, industrials, and financials, has fallen more than 4% this year while the S&P 500 has risen approximately 8%.

Notably, the fund does not hold shares in Trump Media & Technology Group Corp., the parent company of Truth Social. That stock has repeatedly hit record lows this year, though it rebounded in July. It remains down 35% year to date.

Not all Trump-linked ETFs are underwater, however. The Point Bridge America First ETF, which trades under the ticker MAGA, declined less than the broader US stock market in March when the Iran war began and has remained positive for the year.

"The Iran war is causing some concern around energy prices," said Hal Lambert, founder of Point Bridge Capital. While that has created headwinds for re-shoring themes in the near term, "there's a lot of energy in the MAGA ETF," which has helped the fund roughly match the S&P 500's performance.

A further challenge is that investors are finding it increasingly difficult to interpret the White House's policy strategies and their eventual implementation. Since Trump took office, stock market participants have had to track a barrage of his social-media posts and executive orders, attempting to identify potential market winners and losers — only to watch the president reverse course or change direction.

"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 most recent source of uncertainty stems from the Trump administration's decision this week to replace the expired temporary 10% global tariff on goods entering the US with targeted measures under Section 338 of the Tariff Act of 1930, a provision that has been rarely invoked in modern trade history and gives the president authority to impose restrictions on goods from countries deemed to discriminate against US commerce. Trump also imposed 50% tariffs on a range of Canadian products this week, including beer, wine, paper, and hockey sticks. Canada is the largest single export market for the US. Other countries are expected to face additional targeted Section 338 tariffs, with China and Europe identified as the next likely targets, TD Cowen analyst Chris Krueger wrote in a July 20 note.

"Now is really not the time to be pressing this," said Mark Malek, chief investment officer at Muriel Siebert, noting that inflation and oil prices remain elevated while investors worry that corporate margin expansion could slow. "We have to be very, very careful right now." Malek added that the stock market has already rallied despite the Strait of Hormuz being shut as a result of the Iran war, effectively using up its one "get-out-of-jail card." The Strait of Hormuz, a narrow shipping channel between Iran and Oman through which roughly a fifth of global oil consumption normally passes, is one of the world's most critical energy chokepoints.

Even so, with the Trump Trade seemingly on the ropes, some steadfast supporters of the president argue that abandoning it now would be premature. Point Bridge Capital's Lambert — a longtime Republican who served on Trump's inaugural committee — believes the president's policies will ultimately produce winners in the stock market.

"It's a long-term play," he said. "You don't build a manufacturing facility overnight."