Tariffs are falling more quickly than Wall Street expected
Tariffs remain the story of the stock market right now.
Early Monday morning, a 90-day tariff pause between the US and China set the tone for the week in markets.
The S&P 500 (^GSPC) closed the week up around 5%, while the Nasdaq Composite rallied around 7%. Both major indexes are now higher than they were before Trump escalated the trade war by pushing tariffs to their highest level in a century.
And as our Chart of the Week shows, the US effective tariff rate has been moving lower over the past month as stocks have rallied. At 14.4%, the effective US tariff rate is nearly back to its pre-"Liberation Day" level too.
So perhaps, taken at that simplistic level, it makes sense that stocks have soared so much in the past month, given that the headwind that sent markets lower has eased significantly.
But in markets, the news isn't just about what's said. It's also about how what was said matches investor expectations. On April 2, tariffs negatively surprised as Trump's announcements were, as we wrote at the time, "worse than expected."
Well, the latest round of tariff announcements brought up a counter phrase: "Better than feared."
In a note to clients on May 9, the day before trade negotiations between the US and China were set to begin, JPMorgan chief US economist Michael Feroli estimated tariffs on Chinese goods could fall to "at least near 60% for now." This would've lowered Feroli's estimated effective tariff rate to 17%.
Instead, a 30% tariff rate pushed Feroli's overall tariff estimate down to the 14.4% seen in our chart. This was enough for Feroli to no longer call for a recession in the US this year. Since tariffs are like a tax on the consumer, Feroli reasoned the tariff rollback was equivalent to a $300 billion "tax cut" for Americans.
"The rolling back of this tax should provide some relief to consumer spending, and in our modeling is enough to tip the second-half growth outlook from one of modest contraction to one of modest growth," Feroli wrote.
Goldman Sachs had expected China tariffs to land around 54%. Again, they came in better than expected. For the equity strategy team at Goldman Sachs, this was a key contributing factor in boosting the year-end S&P 500 target from 5,900 to 6,100. Goldman also holds a 12-month target of 6,500.
The prevailing market hope over the past week is that the success Treasury Secretary Scott Bessent had in Geneva, Switzerland, last weekend is the start of something more. The bulls are betting on more deals, and potentially even a lower effective tariff rate than our Chart of the Week shows.
All of which keeps the market's focus squarely on tariffs — and whether the next move in the discussions is in line with, better, or worse than expectations.
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