A temporary tariff truce between the United States and China sent stocks soaring on Monday. However, strategists say levies that remain higher than they were at the start of the year still pose a threat to growth. At the same time, the uncertain path to a lasting agreement means more market volatility could be on the horizon.
Following talks in Switzerland over the weekend, the two countries reached a deal that would reduce US tariffs on Chinese goods to 30% and Chinese tariffs on US goods to 10%. Last week, a 145% US tariff on Chinese goods and a 125% Chinese tariff on US goods was threatening to bring trade between the two economic powerhouses to a standstill.
“The heat has been turned down, big time, at least over the next 90 days,” BMO Capital Markets senior economist Jennifer Lee wrote in a note to clients on Monday. “The steep tariffs had already started to negatively impact economic activity, so it is in everyone’s best interests to talk this out.”
The scaled-back tariffs took markets by surprise, with the Morningstar US Market Index rising 3.3% on Monday. “The reduction in tariffs by both countries is more than what we were looking for,” says Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute. He characterizes Monday’s market action as a relief rally.
Tariffs Risks Remain Top of Mind
But even as markets celebrate, strategists say it’s too soon to put tariff concerns in the rearview mirror. For one thing, a 30% tariff on Chinese goods could still have a meaningful impact on global trade and growth. It’s equivalent to the 20% tariff Trump imposed in February plus the additional 10% universal tariff, explains Christopher. “That’s still a higher tariff than we had at the beginning of the year,” he says.
“The markets are getting very excited too early,” asserts Michael Field, Morningstar’s chief European markets strategist. “The US-China deal has 30% import taxes on Chinese goods, which could still stem trade flow.”
In a speech on Monday, Federal Reserve Governor Adriana Kugler said that even reduced tariffs could weigh on economic growth. “Trade policies are evolving and are likely to continue shifting,” she said in prepared remarks. “Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and the uncertainty associated with these tariffs has already generated effects on the economy through front-loading, sentiment, and expectations.”
And then there’s the prospect of difficult negotiations in the weeks ahead. “This is deescalation, not a trade deal,” writes Jeff Buchbinder, chief equity strategist for LPL Financial. “More work remains to be done. A pause isn’t permanent.”
Christopher believes deals that leave significant tariffs in place will slow the economy further. “So yes, relief rally today,” he says. “But how long does it last?”
Adds Lee: “Businesses on all sides are still facing higher costs than the beginning of the year, and there is still fear that if talks break down, tariffs could be pushed higher again.”
The Bottom Line for Investors
Market sentiment has improved dramatically over the past month, and stocks have recouped all the losses they incurred in the wake of the April 2 tariff announcement, and then some.
But more swings in the stock market could be on the horizon, especially if trade negotiations prove thorny. “Challenges certainly lie ahead in forging a durable agreement between the US and China, which could lead to further bouts of volatility,” writes Ulrike Hoffmann-Burchardi, chief investment officer of global equities at UBS Global Wealth Management. She adds that opportunities will remain for investors who are able to look beyond the volatility and invest selectively. She still views US stocks as attractive.
Dave Sekera, Morningstar’s chief US market strategist, points out that stocks are now trading just under Morningstar’s assessment of the market’s fair value. That means there’s less room to recover if the path forward proves bumpy. “At this point, the market is no longer providing any margin of safety if trade negotiations were to break down, require more time than 90-day deadline provides, or if finalized trade terms are so restrictive as to impair economic activity and lead to a broad earnings slowdown,” he says.
A relief rally like this (even if it’s fleeting) may also provide opportunities for investors to rebalance. Christopher advises investors to consider whether they’ve deviated from their long-term allocations. “Is there anything that you had wanted to sell, or would have wanted to sell back at the end of January, had you known that the tariffs were going to be this high?” He suggests paring back holdings in small caps and developed and emerging markets, which he expects to underperform as the year progresses. “We think that the bad economic news for international is just beginning,” he says, as tariffs begin to dent factory production in China and Europe.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
