Fri, 04/25/2025 - 13:05
Following an initially optimistic reception on Wall Street, the dream of Trump's second term has transformed into something of a nightmare for US stocks. What was first dismissed as Trump's classic "art of the deal" bluster actually came to pass on 4 April 2025, when double-digit tariffs were announced against a raft of countries, many of which are traditional allies and historic trading partners of the US. Most of these were eventually paused for 90 days, with one notable exception: China. The People's Republic was hit with a tariff rate of 145%, and the impact on the heavily China-reliant US economy was swift and severe. The flagship S&P 500 and Nasdaq 100 have dropped around 10% and 15%, respectively, since February, with the Magnificent 7 tech stocks losing over 20% as of 21 April.
But thankfully for stockholders everywhere, it looks like the tide may be about to turn. Under significant pressure from the media and close advisors, Trump has pledged to "significantly" reduce the current tariff rates on China, sparking daily gains of over 4.5% for the Mag 7 and more modest increases for the other major indices. It appears, then, that it is Trump who has blinked first in the game of economic chicken between the world's two biggest superpowers. However, there's still a long way to go until trade relations are fully normalised, and plenty of potential pitfalls dot the road. Is this the beginning of the end of the trade war, and what else could impact stock prices in the rest of 2025?
Imperial decline
After playing extreme hardball by imposing triple-digit tariffs and insisting that Chinese President Xi Jinping initiate negotiations, Trump lost significant face when China imposed their own 125% tariffs on select US goods and services and made clear that they weren't prepared to be bullied like the US's other trading partners. With the cost of consumer electronics spiralling out of control, Trump was forced to exempt these core Chinese export products from the tariffs. Now, following the filing of a lawsuit with the US Court of International Trade in New York by 12 major US states, Trump has agreed to cut general tariffs against China "substantially", though he did warn that "they won't be zero".
According to a Wall Street Journal report, the White House is going to slash the current levies by as much as 50%, introducing a sliding scale with lower duties (35%) on non-strategic goods and higher rates (up to 100%) on items deemed critical to US national security. This is excellent news for all companies that use Chinese-manufactured goods in their production cycle, a group that includes powerhouses like Apple, Tesla, Microsoft, and NVIDIA. It's clear, then, that China has held its nerve where the Trump administration expected Xi to fold like he did during the first trade war.
China learnt its lesson from 2018-2019 and has made several key changes to reduce its reliance on the US, such as cutting its soybean imports by half, investing heavily in its Belt and Road initiative, and carving out a virtual monopoly in rare earth refining. Not only has it seemingly gained the upper hand in its own negotiations with Trump, but it has also threatened to punish any other sanctioned countries who appease the US at China's expense in a watershed move that really asserts the status of the PRC in the new global order.
Internal discontent
While an end to the trade war may be in sight, the US stock market is far from out of the woods just yet. The tensions between the White House and the country's financial regulator flared up significantly this past week, as Trump called Fed chair Jerome Powell "a major loser" whose "termination cannot come soon enough", accusing him of "making a mistake by not lowering interest rates". The aim was clear: pressure Powell into premature rate cuts as a way to buoy stocks without Trump having to lose face in the tariff battle with China. However, after advisors warned him of the legal and economic ramifications, he softened his stance on 22 April, saying he now had "no intention" of firing Powell. The CME FedWatch tool now has the possibility of a May rate cut above 50%, which could suggest that Trump's efforts might pay off in the end, to the likely benefit of US stockholders everywhere.
Nonetheless, it's evident that the political establishment is at loggerheads with Trump, and this will naturally frustrate his attempt not only to win a trade conflict with an adversary whose mandate is monolithic and unchallenged but also to project real political and economic power internally and on the world stage. In short, US indices might well recover in the short term following a normalisation of trade and a softening of Fed policy, but the longer-term impact of this international embarrassment could be much more severe. Such a loss of face to the second-largest world economy could hasten the decline of US hegemony, much like the Suez Crisis did for British military power. Thus, while the S&P 500 and Nasdaq 100 surely have more growth in them, it might be wise to diversify to the China A50 and Hang Seng, too.
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