Quick Bite – Trump Tariff Backdown Sees Stocks Surge
Stocks surged on Monday 12 May after the US and China de-escalated their trade war, with the S&P 500 up 3.3% and the Dow Jones up more than 1,000 points. Nasdaq closed up 4.3%. The US dollar jumped 1.5% against a basket of peers in its biggest daily rise since Trump’s election on 5 November.
Source: Financial Times
The cause of the stock spike? The US will reduce its tariff on China to 10% from 125% over 90 days as trade talks continue, but a separate 20% tariff remains. Despite the rally, caution persists due to remaining high tariffs and disrupted business plans, with uncertainty about future policy.
The negotiations mark a significant de-escalation in Trump’s global tariff offensive, which had sent the S&P 500 falling 15% following Trump’s “Liberation Day” announcement on 2 April. The S&P 500 has now erased those losses, and is down just 0.6% for 2025.
Source: FactSet, WSJ
Of course, many investors remained cautious. No-one really knows where markets go from here. Tariffs overall remain at their highest levels in decades, far higher than expected at the start of Trump’s term. The on-again, off-again trade restrictions have already disrupted business plans and supply chains, damaging the economy and corporate profits.
Despite exceptionally volatile stock and bond markets in April, major benchmarks now stand close to where they started the year. The S&P 500 is flat for the year to date, and the 10-year Treasury yield is down around 10 basis points.
We still expect economic consequences in the months ahead. Backward-looking economic data (so called “hard data”) have shown little evidence of a slowdown. But many businesses and households have reported a shock in sentiment and are struggling to make plans against a backdrop of rapidly shifting trade policy (“soft data”). Usually, hard data follows the soft as sentiment surveys transition into sales and investment reality. Recent trade disruptions could hardly be compared to the pandemic shock, but we do know that economic damage sometimes takes a long time to float to the surface.
Can we hope for a “Trump Put”? That is, whenever the market looks shaky, President Trump, or better still, Secretary Scott Bessent, announces a major tariff agreement? Trump will need to declare victories in his trade wars with multiple countries around the world sooner rather than later. He must avoid a recession caused by his tariff wars. Otherwise, Republicans risk losing their paper-thin majorities in both houses of Congress later in 2026. Also, court cases are piling up that challenge the President’s legal authority to declare a crisis to justify his tariff hikes. If courts rule that Trump’s tariffs are unconstitutional, he still could declare that he won the trade wars and so doesn’t need tariffs anymore.
Perhaps the stock market develops “tariff deals fatigue”? If so, then the focus will shift to how much Trump’s tariffs weighed on the economy and earnings.
Looking at US corporate earnings
Corporate earnings in 1Q 2025 were surprisingly resilient. Aggregate S&P 500 EPS grew 12% year on year in 1Q, beating the consensus expectation of 6% growth at the beginning of reporting season. The median S&P 500 stock grew earnings by 6%.
Source: Goldman Sachs
US earnings growth consensus for the next year is around +4% to +7%, but there is heightened uncertainty and a lack of conviction in these forecasts. Unknown GDP growth in the second half of this year has led many companies to maintaining guidance “while excluding the potential effects of tariffs”.
Source: Goldman Sachs
A recession is the main downside risk to markets. S&P 500 EPS typically fall by 13% peak-to-trough during historical recessions. Broker economists are trying to assign a probability to US recession, but changes to tariff policy keep shifting the goalposts. Goldman Sachs overnight reduced their probability percentage from 45% to 35% when news of the US/China agreement broke.
Source: GS
During the rest of 2025, the combination of an already-expensive market sitting on a 22x PE multiple and deteriorating growth data should make it hard for equities to rise substantially. Ultimately, however, the avoidance of an economic recession – if it happens – and increasing confidence in an earnings re-acceleration in 2026, plus 2 or 3 rate cuts by the Fed later this year should prevent a major decline in US indexes over the next 12 months. So perhaps that leaves us with a “muddle-through” scenario as the most likely pattern for this year.
Source: GS