By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Incremental progress toward a refreshed trade agreement between the United States and China was just what the doctor ordered for markets last week as the S&P 500 (SPX) strung together five consecutive days of gains. Expectations going into U.S.–China trade talks in Switzerland were low, and the eventual outcome (albeit details on a final agreement were light) was favorable enough to create a renewed sense of optimism among investors. Both countries agreed to slash tariffs from artificially high levels established just a few weeks earlier after President Trump made it clear that China was the Moby Dick of his trade aspirations. On April 10, Trump opted to pause tariffs on all countries except for China, signaling his view that China was the worst trade offender. Under the agreement, the United States will lower its tariff rate on Chinese goods from 145% to just 30%, while China will cut theirs from 125% to 10%.
A joint statement noted “the importance of a sustainable, long-term, and mutually beneficial economic and trade relationship.” The current agreement is good for just 90 days while the two sides work to hammer out a more comprehensive deal. Treasury Secretary Scott Bessent continued to boost his profile as the adult in the room when it comes to trade policy. At a press conference following the deal announcement, he struck a conciliary tone, stating, “The consensus from both delegations is neither side wants to be decoupled…we do want trade, we want more balance in trade. And I think both sides are committed to achieving that.”
While the progress made so far is encouraging, a substantial amount of uncertainty remains. Trade agreements of the size and scope needed to address the complexity of the U.S.–China economic relationship can take years to work through, a fact that Bessent acknowledged in his remarks. Based on what we’ve seen from other trade negotiations so far, progress will likely be uneven as the Trump administration relies on unpredictability as a tactic. The reprieve may prompt some companies to resume imports while tariffs are lower, but some remain wary of ramping up orders dramatically without a solidified deal, or at least an agreement longer than 90 days.
In contrast to the cautious approach from corporations, investors took the tariff pause as an opportunity to throw caution to the wind. Monday, May 12 saw stocks rip higher as investors took the China trade news as a sign that the coast was clear. SPX gained 3.3% while the technology-heavy Nasdaq gained 4.4%. Stocks that are closely tied to trade with China, especially those that have been under pressure in recent weeks, saw the strongest performance. Shares of Tesla, Apple and NVIDIA all gained more than 5% on the day, powering markets to their best performance since April 9.
The Nasdaq continued its market leadership Tuesday, gaining 1.6%, while SPX rose 0.7% but moved back into positive territory year-to-date. Trade optimism was bolstered by inflation data that showed price pressures continue to cool, albeit slowly. The Consumer Price Index (CPI) was up 2.3% year-over-year while Core CPI, which removes the impact of volatile food and energy costs, rose 2.8%. Both readings were in line with economists’ consensus expectations. The relative lack of progress on core inflation compared to the Federal Reserve’s (Fed) long-term target of 2.0% inflation shows that there are still some issues to be worked out before the Fed should feel comfortable resuming rate cuts.
Wednesday saw slighter gains from SPX and Nasdaq after enduring a volatile session where stocks swung between gains and losses. Investors looked for additional progress on deals with major trade partners other than China but were left mostly disappointed. What did gain the market’s attention on Wednesday was President Trump’s visit to the Middle East. The trip produced several deals in which Gulf nations agreed to purchase goods from domestic manufacturers and invest directly in the United States in the coming years. Saudi Arabia promised to invest $600 billion over the next four years while the United Arab Emirates pledged $1.4 trillion over a decade. Qatar also committed more than $200 billion with plans for significantly more investment over time. The deals focused on purchases of industrial metals, planes and jet engines, high-tech semiconductors and datacenter infrastructure, military equipment, as well as software from major cloud computing suppliers.
Thursday saw a reversal of fortune for the Nasdaq, which fell 0.2%, while SPX was able to lock in a 0.4% gain to extend its win streak to four days. Positive sentiment tied to the trade developments and decent inflation data was boosted by a retail sales report that reflected robust consumer activity despite economic uncertainty. Retail sales are expected to be choppy in the coming months as consumers respond to trade uncertainty by pulling forward or delaying purchases depending on the latest headlines. Consumers have confounded investors and economists in recent months as consumer sentiment and actual consumer activity have diverged. Surveys show that consumers feel terrible about their current prospects. Friday’s consumer sentiment report showed a drop to 50.8 from 52.2 in April and reflected pessimistic expectations for future inflation.
However, those feelings have yet to be reflected in hard data, and concerns about a consumer-led recession seem unfounded based on consumer balance sheets and recent corporate commentary. Major banks and credit card companies have all noted that consumers remain in good shape, especially when it comes to wage growth, employment and savings, even if they don’t feel that way. This is a phenomenon that the Fed has picked up on as well. In its most recent statement it noted, “While it is important to recognize how consumers feel, we should exercise caution when using consumer sentiment surveys to infer future consumer behavior given this recent disconnect between what consumers say and do.”
The week ended with continued easing of trade fears as all three of the major U.S. indices ended in positive territory. The Dow Jones Industrial Average, SPX and Nasdaq gained 3.4%, 5.3% and 7.2%, respectively. SPX has gained more than 20% since its April 8 low, led by a rally in mega-cap technology stocks. The recovery has come at a historic pace despite relatively little progress on the trade front from where we were before “Liberation Day.” I remain worried that the combination of economic uncertainty and a higher effective tariff rate will weigh on growth this year. I do believe we will be able to avoid a recession if talks with China remain on track, but we likely sacrificed some growth along the way.
Looking forward to this week—it is a very light lineup of economic data, and much of the news will likely come from the busy slate of Fed speakers. The biggest development of the week will likely be the downgrade of the U.S. credit rating from AAA by Moody’s Ratings. The downgrade is largely symbolic but reflects the issues the United States faces when it comes to fiscal policy and the growing national debt.
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST | PREVIOUS |
| MONDAY, MAY 19 | ||||
| 10:00 am | U.S. Leading Economic Indicators |
April |
-0.9% | -0.8% |
| TUESDAY, MAY 20 | ||||
| Various Federal Reserve Speakers | ||||
| WED., MAY 21 | ||||
| Various Federal Reserve Speakers | ||||
| THURSDAY, MAY 22 | ||||
| 8:30 am | Initial jobless claims |
May 17 |
230,000 | 229,000 |
| 9:45 am | U.S. Services PMI |
May |
50.8 | 50.8 |
| 9:45 am | U.S. Manufacturing PMI |
May |
49.8 | 50.2 |
| 10:00 am | Existing Home Sales |
April |
4.12M | 4.02M |
| FRIDAY, MAY 23 | ||||
| 10:00 am | New Home Sales |
April |
700,000 | 724,000 |
| MONDAY, MAY 26 | ||||
| Memorial Day, U.S. Markets Closed, No Data Releases |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market