Investors could be getting ahead of themselves after Trump's trade truce
Investors might be jumping the gun on President Donald Trump's tariff detente.
Markets celebrated the US-China deal to temporarily reduce tariffs on Monday, going into a buying frenzy that pushed the S&P 500 up 3.2% after Treasury Secretary Scott Bessent said US tariffs on Chinese goods had dropped to 30%. Stocks have now recovered all of their losses since April 2.
The news was a huge improvement in US-China relations from just weeks ago, when tariffs on China were as high as 145%. It's also the latest in a string of Trump walk-backs, signaling the president's appetite for escalation continues to wane. So, in some ways, this week's rally has made sense.
Still, investors could be declaring victory over Trump's tariffs too soon for a number of reasons.
For one, tariff rates on China remain at 30%, and still sit at 10% for most goods entering the US from around the world. This reality might eventually sober investors up, as tariffs threaten to both reignite inflation and slow demand enough to spark a recession. While April inflation data proved stable on Tuesday, prices could start to jump in the near future. It's why the Federal Reserve is so reluctant to cut rates.
"Depending on how tariff policy unfolds in the months to come, we expect that tariff pricing pressures may escalate over the summer months and beyond," said Rick Rieder, BlackRock's chief investment officer of global fixed income, in a statement on Tuesday.
This inflation risk assumes Trump keeps tariffs at current levels — and he may well not. Most of his "Liberation Day" pauses are set to resume in a couple months' time. Though it appears unlikely that tariff rates will revert to the same heights, the potential is there for Trump to ratchet up import taxes again to some degree if he so chooses.
"This is de-escalation, not a trade deal. More work remains to be done. A pause isn't permanent," said Jeff Buchbinder, the chief equity strategist for LPL Financial, in an email on Monday about the temporary US-China deal.
Investors, rightly or wrongly, don't seem to be pricing in such a risk.
"I think this rally is just too much too fast until we get more specificity as far as what the real trade terms are going to be, what they may have as far as impacts on the economy overall, as well as what individual companies will be affected and which ones aren't," said Dave Sekera, Morningstar's chief strategist, in a note on Monday.
Plenty of risks aside from tariffs remain as well, like the debt ceiling, how potential tax cuts play out, and whether geopolitical tensions cool or worsen, said Scott Clemons, chief investment strategist at Brown Brothers Harriman.
Clemons told Business Insider on Tuesday that while recession clouds are starting to clear with the trade outlook improving, the recent spell of volatility in financial markets probably isn't over.
"I don't think we're out of the woods yet in terms of the volatility," Clemons said. "Even yesterday talking to clients after the relief rally: 'Oh my god, thank the whole tariff thing is over.' I'm like, 'Keep your seatbelts on until the ride comes to a stop.' And we're not there."
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