Domino effect from trade negotiation boosts stocks
Solid US economic data also helps as equities reverse their April freefall.
Bottom Line
The recent progress the US has made on trade with the UK and China, in conjunction with relatively solid economic data across the board, have reversed the equity market’s early April tailspin. After plunging 15% from President Trump’s disastrous “Liberation Day” tariff announcement in the White House’s Rose Garden on April 2 to bounce off the S&P 500’s long-term support on April 7, stocks have surged more than 22% over the past five weeks. The S&P has now recovered all the ground lost since April 2.
Under the trade agreement forged this past weekend with China, the US reduced its tariff on Chinese imports to 30% from 145% and China lowered its levy on American goods to 10% from 125%. So, the US baseline tariff of 10% remains in place, as does a punitive 20% tariff because of the unencumbered flow of fentanyl from China. The trade agreement with the UK creates a $5 billion opportunity for the US to export ethanol and beef, among other agricultural products, while establishing a reciprocal tariff rate of 10%.
Who’s next in line? The US is thought to be negotiating with about a dozen other key trading partners, including India, Japan, Vietnam, South Korea and Australia, to reduce their reciprocal tariff rates. According to Treasury Secretary Scott Bessent, the plan is to use the process of the U.K. and China deals to construct a template for the remaining negotiations over the next 90 days. To be sure, the outcome remains uncertain, and Bessent has discussed “strategic uncertainty” as a critical element of Trump’s shock-and-awe tariff negotiating approach. But equity investors have seemingly taken comfort that Bessent appears to be in charge, having snatched the reins from Peter Navarro, who was the architect of Trump’s ill-fated tariff turmoil.
Let’s make a deal We had originally thought the US would attempt to reach deals with all of our major trading partners except for China, in an effort to isolate it and create leverage for better terms. China likely recognized Trump’s strategy and intentionally jumped the line to salvage the critically important Christmas season. US buyers typically place orders in the spring for third-quarter shipments ahead of the retail holiday season that starts in October. Chinese manufacturing has slowed because US buyers have been reluctant to do this due to tariff fears.
Trump must be delighted he managed to extricate himself from his self-imposed tariff mess. The bottom line is that the two economic superpowers were unwilling to blow each other up, and they successfully constructed an off-ramp. This could serve as an important negotiating lesson to the rest of the world to come to the table soon to get the best trade deal. The tariff negotiating line may form quickly.
'Hard' data prevailing The more quantifiable (non-survey) US economic data remains solid. Several key examples:
- Core CPI retail inflation declined sharply from a peak of 6.6% year-over-year (y/y) in September 2022 to 3.4% y/y in May 2024, then stalled at 3.2-3.3% over each of the past eight months through January 2025. But it surprisingly plunged to a four-year low of 2.8% in March and April 2025. Lower energy and egg prices eased inflationary pressures last month. Critics contend that if the tariff situation is not resolved soon, inflation will re-accelerate later this year.
- Nonfarm payrolls rose by a higher-than-expected 177,000 jobs in April, as the anticipated chilling effect on hiring from Trump’s tariff chaos has not yet made its way into the labor market. Household employment rose by 436,000 jobs—more than double March’s pace—which drove the participation rate up for the second consecutive month to 62.6%. Average hourly earnings held steady at an eight-month low of 3.8% y/y, and the unemployment rate was unchanged at 4.2%. But critics argue that DOGE’s federal government layoffs will filter through the labor market and the economy in coming months.
- Gross Domestic Product (GDP) slipped into the red during the first quarter of 2025 for the first time in three years, contracting 0.3% quarter-over-quarter (q/q). But underlying economic growth was solid, with personal consumption, corporate spending and housing all stronger than expected. As a result, private domestic final sales grew 3.0% in the first quarter versus 2.9% in last year’s fourth quarter. A record 41% q/q surge in imports was likely due to US buyers trying to beat potentially higher prices due to tariffs. That subtracted 5 percentage points from GDP growth. But if the tariff problem stretches out, economic growth is expected to slow.
- First quarter reporting season is solid We’re 90% through company reports, and the results are better than expected. Revenues are up 4.3% y/y (slightly above a 4.2% consensus estimate), while earnings have risen 12% y/y, much stronger than the consensus 7.3% increase. Given the lack of visibility of trade negotiations, however, managers are providing cautious guidance for the balance of 2025.
It's darkest just before dawn In the uncertain wake of Trump’s tariff policy, many investors were legitimately concerned about the likelihood of slower economic growth, higher inflation, rising unemployment, reduced corporate earnings and a possible recession. But sentiment has clearly improved over the past six weeks. The Volatility Index (VIX) has taken a roundtrip, soaring from 15 in mid-February to 60 on April 7 and back to around 18. With slightly better confidence, we are reaffirming our target prices for this year at 6,500 and 7,000 in 2026.
Whither the Fed? At the conclusion of last week’s FOMC meeting, Federal Reserve Chair Jerome Powell discussed the risks of higher unemployment/inflation and slower economic growth due to the trade negotiations. He repeatedly said the Fed was likely to take a patient, wait-and-see approach with the hard economic data before adjusting interest rates. Consequently, bond vigilantes have scaled back expectations for two quarter-point rate cuts in 2025, with the first likely coming at the September 17 FOMC meeting.