Equities Rise in the Eye of the Tariff Storm
At the start of 2025, a 30% tariff on Chinese goods would have led to a widespread de-risking.
However, market participants are treating this past weekend’s de-escalation from the 145% tariff on Chinese goods (effectively a trade embargo) as an all-clear on risk assets.
The "progress" on trade talks likely indicates we are past peak tariff shock, but we think the market has been too fast to dismiss tariff pain.
Businesses and consumers will need to share the burden of higher tariffs, and we expect both margin pressure and slower demand in 2H25.
For example, Walmart noted on their earnings call this week a growing customer bias towards value and convenience, while also indicating that they may have to raise prices further from here in response to the tariffs. So, while we are encouraged by the trade discussions, we need to see more material progress to meaningfully lower tariff rates over the next 8-10 weeks to return our economic and earnings growth expectations to pre-tariff levels.
3 Things to Know
US-China De-escalation Is not “All Clear”
Recent progress on trade talks likely indicates we are past peak tariff shock. Businesses and consumers will need to share the burden of higher tariffs, and we expect both margin pressure and slower demand in 2H25. We need to see more material progress on lowering tariffs over the next 8-10 weeks before returning to our pre-tariff expectations about economic and earnings growth.
Consensus Earnings Estimates too Optimistic
Equities have surged and volatility has plummeted on trade optimism – all while forward fundamentals remain deeply uncertain. We continue to believe that consensus US EPS forecasts are likely too optimistic.
With the S&P 500 trading at 22 times forward estimates, we believe that the market is more than fairly priced. We have taken particular note that analysts forecast the majority (64%) of the 2025 S&P 500 EPS growth will once again come from Tech and Communication Services.
Like in ‘23 and ‘24, AI-related growth may once again prove more durable than trade and consumer-sensitive segments. We wouldn’t bet against large U.S. corporations’ ability to navigate uncertainty, but we are biased towards styles such as earnings sustainability ahead of an uncertain 2H 2025.
Makings of Monetary Policy Divergence
The Fed remains paused until there is a meaningful economic slowdown. Encouragingly, the labor market remains stable, and the inflation data has improved. This week’s CPI data showed year-over-year headline inflation fall to 2.3%, the lowest monthly report since 2021.
Even so, still-elevated core inflation and recent surveys indicating possible tariff-induced price increases ahead supports an on-hold Fed in the near term. Markets are now pricing about two rate cuts in 2025, down from a peak of four in early May.
While the FOMC should continue to be patient in adjusting monetary policy given low visibility into the forward outlook, other global central banks have more freedom to ease, and we expect monetary policy divergence over the balance of 2025.
See our weekly CIO Strategy Bulletin for more details