Markets finally woke up to tariff reality. Is this a buying opportunity?

Regular readers might think me capricious for even asking the question. I took the other side, concerned about the threat of tariffs, an immigration clampdown and frothy markets when investors were focused on tax cuts and deregulation. But prices have moved, and prices matter.

The case for thinking the selloff is overdone is that markets have broadly dropped back to where they were at the election. Some falls are extraordinary: Tesla is down 45% from its high in mid-December. Since its IPO Tesla has fallen more in such a short period only in 2022, when the Federal Reserve was aggressively raising rates.

The Nasdaq 100, dominated by Big Tech, and the Russell 2000 index of smaller companies were both briefly down more than 10% from their postelection highs on Friday, before Federal Reserve Chairman Jerome Powell’s reassuring words on the economy prompted a rebound. Both are lower than on Election Day. The S&P 500 didn’t go up so much and hasn’t fallen so much, but is still below where it stood on Nov. 5. This isn’t just about the Magnificent Seven big tech stocks: The equal-weighted version of the S&P is also down.

The dollar has dropped sharply but remains slightly above where it stood before the election result, while the Mexican peso is actually stronger than on Election Day.

For anyone who thought Trump’s talk of deregulation and lower taxes would boost economic growth, this should be a great opportunity. The rest of the market has given up on the “American exceptionalism" trade.

I have trouble turning bullish for the long run, because I fear the new world order Trump is ushering in won’t end well for investors. But in the short term, this feels like a very rapid selloff that at the least undoes much of my concern about the excess in markets. Investors have shifted from being super-positive to focus instead on the dangers. When sentiment turns sour, it is often a good time to pick up bargains.

The risks to this view are threefold.

First, prices haven’t moved that much. U.S. stocks weren’t cheap on Nov. 5, and aren’t cheap now. Stocks are still above 21 times estimated earnings for the next 12 months (their dotcom-era high 25 years ago was 25 times). It remains true that much of this high valuation is due to the heavy weight in the S&P of the Magnificent Seven: Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla. But if they plunge back to lower valuations, they are so big they drag down the index as a whole.

Second, the bad parts of Trump’s agenda, tariffs in particular, are paralyzing business and scaring consumers. Economic data has weakened and come in below expectations, prompting the most recent leg down in stocks. If hiring and expansion plans are put on hold because of uncertainty about trade, weakness could spread. I don’t know how to forecast this; we don’t have experience of heavy tariffs on our closest trade partners being imposed, modified, then largely deferred, then new tariffs threatened, all within a week. But I do know that confidence matters, and this isn’t a good way of boosting animal spirits.

The slowdown could just be the return to a reasonable, lower, level of growth after the economy ran at an unsustainably fast pace last year. But if confidence suffers, it could be the start of something much worse.

The markets have already started to prepare for a slower economy. Expectations for Fed rate cuts this year have risen, and the 10-year Treasury yield has dropped fast. In stocks my equal-weight index of defensive sectors least sensitive to the economy is slightly up since the latest selloff began in mid-February, while cyclicals exposed to economic growth are down 8%.

Third, the good bits of Trump’s agenda are also in question. Investors hoped that as well as extending the 2017 tax cuts, a flurry of other tax cuts on tips, overtime and social-security payments would both transfer money from government to shareholders and stimulate the economy. Congress is still working out how to extend the tax cuts, but the proposal from Republicans in the House includes $2 trillion of spending cuts, almost halving the stimulatory effect from the $4.5 trillion tax extension. Exactly what will emerge from the reconciliation process remains unclear.

Deregulation is being done with an ax rather than a scalpel. Trump has attempted to dismantle entire government agencies, leading to repeated legal setbacks. Elon Musk’s “Department of Government Efficiency" has focused on mass layoffs, rather than productivity. Companies might see the benefits eventually, but for now they get more headlines about fired workers being rehired than about deregulation.

Hopes for deregulation are alive in cryptocurrencies, where some of Trump’s earliest directives have already taken effect, and banking, where the Treasury has discussed cutting capital requirements. But both have reversed big parts of their postelection gains as markets fell, with bitcoin down 18% from its December high and bank stocks now up only 4% from the election, having risen as much as 19%.

Investors who think the economy is merely going through a soft patch, that tax cuts will be big and that the administration will manage worthwhile deregulation should be thinking about buying. I’m glad the froth has been blown off, but I’m in wait-and-see mode—also known as paralyzed by uncertainty.

Write to James Mackintosh at james.mackintosh@wsj.com