Wall Street’s uncritical love affair with Donald Trump is over. For five months, traders have swallowed whole the idea that the president would swiftly get a package of tax cuts through a Republican-dominated Congress, giving a boost to growth and corporate profits in the process.

Yet the first real test of Trump’s ability to get lawmakers to do his bidding – the repeal of Obamacare – has been a disaster. The resistance on Capitol Hill has left the financial markets wondering when – and indeed whether – Trump will be able to deliver on his fiscal boost.

This dose of reality is long overdue. The initial market reaction to Trump was negative but brief. Within 24 hours, Wall Street banished all its doubts and bet everything on the notion that the new man in the White House would lift the US economy out of its low-growth rut.

Yet the initial doubts were valid. Trump lacks political experience and so does the team around him. The new president’s bully-boy tactics have gone down badly on Capitol Hill and not just with Democrats. There are plenty of Republicans who find Trump and his methods odious.

So, when it became clear last week that the repeal of Obamacare was not going to be legislative plain sailing, there was a predictable response on Wall Street: traders dumped shares. The relentless rise in the stock market since last November’s election – the “Trump bump” – came to an abrupt halt. Up until now, the markets have taken on trust that the president will deliver on his election pledges. And after Trump’s humiliating defeat in Congress on Friday, there is no doubt the mood has changed.

That’s not to say Wall Street is going to see all the gains of the past few months wiped out. But while shares could continue to rise, markets look certain to be a lot more volatile than they have been since November.

There are three reasons for this. The first is that it may be some time before Trump gets agreement for tax cuts and infrastructure spending. It could easily be delayed until 2018.

The second is that the president’s ambitions may well have to be scaled down. Trump wants to use the savings from replacing Obamacare with something cheaper to fund his fiscal boost, but the Congressional Budget Office said last week that the impact on the budget deficit would be substantially less than originally estimated: a reduction of $150bn (£120bn), rather than $336bn. Fiscal conservatives in Congress will probably demand that Trump finds savings elsewhere.

Finally, corporate profits are set to be squeezed by a combination of rising wages, higher interest rates and a stronger dollar. Trump’s fiscal package – assuming it is approved – would reinforce those pressures, because stronger growth would lead to greater demand for labour.

With unemployment below 5%, earnings are already starting to pick up. The Federal Reserve, America’s central bank, has raised interest rates twice since Trump’s victory and will accelerate the pace of future increases if there is evidence that tax cuts are leading to wage inflation.

Higher US interest rates at a time when no other major central bank – the European Central Bank, the Bank of Japan or the Bank of England – is contemplating a move will make it more attractive for investors to hold dollars. The US currency will go up, making American exports dearer.

Until now, the markets have focused solely on the upside from Trump’s economic strategy – the stronger growth – without taking into consideration any of the potential downsides: higher inflation, dearer borrowing costs and an overvalued currency.

Those downsides will become more evident as time goes by. It is too early to say that Wall Street has fallen out of love with Donald Trump. But the whirlwind romance is over. The relationship is entering a new and more difficult phase.

We still need the Co-op Bank

Hundreds of staff in high street banks have had a challenging few days. Royal Bank of Scotland announced that it was closing 158 branches, mostly NatWest sites, while the Co-operative Bank is battling to find a buyer amid fears about its future.

Customers are shifting from banking in high-street branches to organising payments and direct debits on the internet and via smartphones, which is obviously putting pressure on traditional bricks-and-mortar sites. However, despite this, it is essential that a place is found for Co-op Bank.

The bank has been riddled with problems since its disastrous takeover of Britannia building society in 2009, which saddled it with bad loans. It nearly collapsed in 2013 when a £1.5bn black hole was discovered in its balance sheet, but was eventually bailed out through a deal with hedge funds.

This bailout never looked like a permanent solution to Co-op Bank’s problems, and so it has proved. The hedge funds have put the bank up for sale to raise more capital, with a deadline of mid-April for preliminary expressions of interest. Banking sources are now talking about the possibility of a break-up of Co-op Bank, and the Bank of England is understood to be monitoring the situation carefully.

It would send an unfortunate message about British banking if the Co-op brand, which still maintains its ethical policy, were to disappear from the market. This ethical policy means, among other rules, that the bank does not invest in companies selling arms to oppressive regimes, does not support organisations offering payday loans, and has a strict approach to gambling.

Despite its problems, the bank still has about 4 million customers and 105 branches. It remains a substantial player. Unfortunately, its financial problems are also substantial. It slumped to a £477m loss for 2016, its fifth consecutive year in the red. A rescue deal will not be easy, so the Co-op’s owners and Bank of England must do all they can to help. A break-up would be bad for the industry.

A bonus for the Pearson boss who got it wrong?

Consider these facts about Pearson, world’s biggest educational publisher and 47% owner of Penguin Random House books.

• Last year it crashed £2.6bn into the red, the biggest loss in its history.

• It has issued five profit warnings in two years, the last of which, in January, wiped £2bn off its value.

• It has scrapped its profit targets and put its stake in Penguin up for sale in the hope of bolstering its balance sheet. Its net debt climbed from £654m to £1.1bn last year.

• 4,000 jobs were axed last year and the company is “rebasing” – which means cutting – its dividend payout to shareholders.

Chief executive John Fallon said earlier this year: “I am accountable ... I fully accept that accountability for the fact that we got two big calls wrong last year.” So why has Fallon (paid £6m in his four years in the job) just been handed a £345,000 bonus? On top of his £780,000 salary. Could be because executive pay is truly in la la land.