Markets are off to a strong start this week, boosted by news that the U.S. and China have agreed to sharply reduce tariffs for 90 days to allow time for renewed trade negotiations. The upbeat tone follows a choppy week in which major indices slipped modestly as trade headlines overshadowed solid corporate earnings and a largely uneventful Fed meeting where rates were held steady as expected. For the week, the S&P 500 edged lower by 0.5% while the Nasdaq Composite and Dow Jones also posted modest declines of 0.3% and 0.1%, respectively. However, they are on track to recoup most of their year-to-date declines in this week’s early trading.

The outcome of this weekend’s U.S.-China trade talks in Switzerland surprised many investors who had braced for more extreme tariff levels. Over the next 90 days, the U.S. tariff rate on Chinese goods will drop from 145% to 30%, comprising a 10% reciprocal tariff and a 20% surcharge related to fentanyl. China’s retaliatory tariff will fall from 125% to 10%. Going into the discussions, press reports had noted that the U.S. could lower the rate toward 50% while President Trump had suggested 80% tariffs on Friday. Treasury Secretary Scott Bessent emphasized that the current tariff level is a floor on import duties. He also stressed that the intent is not to decouple economically from China, but rather to promote more balanced trade and protect critical industries like steel, semiconductors, and selected medicines. However, it is likely that U.S. importers will continue to shift their supply lines outside of China and Chinese exporters will likewise seek to diversify their direct reliance on U.S. buyers.

Alongside surging risk assets, the trade news has sparked a rebound in the U.S. dollar and sent long-term interest rates higher as recession fears eased and demand for safe haven assets shifted back toward stocks. The U.S. dollar index popped 1.2% following the announcement, but remains down over 6% year-to-date. Meanwhile, the 10-year U.S. Treasury yield is pushing back toward 4.50% after starting the month at 4.16%. Rate cut expectations are also getting dialed back with markets now pricing in closer to 2 quarter-point rate cuts in 2025 compared to 3 or more last week. Two rate cuts would align with the current expectations of members of the Federal Reserve, though Chairman Jerome Powell noted plans to continue the wait-and-see, data-dependent stance following last week’s May FOMC meeting and highlighted limited noticeable tariff impact to date on broad economic data.

There is still a long road to haul for global trade negotiations on many fronts and headlines will undoubtedly remain volatile, but the easing of trade tensions may help to shift more of the market narrative back towards the fundamental outlook for economic growth and corporate earnings. On that front, corporate earnings results for the first quarter of 2025 have generally been encouraging. With 90% of the S&P 500 companies having reported, first-quarter earnings are tracking 13.7% higher year-over-year, well above the 7.2% growth forecast at the end of March. More importantly, forward looking guidance was generally stronger than feared despite trade headwinds and high uncertainty. That said, 2025 earnings estimates have been revised lower, now projecting 9.2% growth versus 12.5% at the year’s start, according to FactSet.

Key data this week—including inflation and retail sales—may begin to show early signs of tariff-related impacts, though any effects in April are expected to be minimal. The April CPI reading is forecast to hold steady at 2.4% year-over-year (2.8% excluding food and energy prices) as tariff price increases only began to filter through later in the month and were offset by price declines in other areas like energy. However, the impact should become more evident over the next few months according to Oxford Economics who has forecasted that roughly two-thirds of the rise in tariffs will end up being passed on to consumers through price hikes that will feed through relatively quickly.

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