What Wall Street's smart minds believe about the US-China trade pact

[UNITED STATES] Wall Street analysts are cautiously optimistic following the recent U.S.-China trade agreement, which significantly reduces tariffs for a 90-day negotiation period. The deal, announced on May 12, 2025, sees the U.S. cutting tariffs on Chinese goods from 145% to 30%, while China lowers its tariffs on U.S. products from 125% to 10%. Market reactions have been positive, but experts warn that underlying economic and geopolitical challenges persist.

Market Reactions: A Mixed Bag

The announcement of the tariff reductions led to a surge in global equity markets. The S&P 500, for instance, experienced a notable uptick, reflecting investor relief over the de-escalation of trade tensions. However, analysts caution that this optimism may be short-lived if the agreement does not lead to substantial structural changes in trade relations.

Mohamed El-Erian of Allianz expressed concerns about persistent inflationary pressures and economic uncertainty, suggesting that the deal might not be sufficient to address the underlying issues. Conversely, Mike Wilson of Morgan Stanley viewed the agreement as a positive development, predicting a potential market rally and reduced recession risks. Torsten Sløk from Apollo noted that the removal of a significant "tail risk" could bolster economic confidence and growth.

Several hedge funds and institutional investors have begun repositioning their portfolios in anticipation of further developments. According to data from Bloomberg, there has been increased activity in Asian equity markets and a notable uptick in trading volumes for logistics and shipping firms. Analysts interpret this as a signal that market participants are betting on an uptick in cross-border trade volume if the temporary truce holds.

Economic Implications: Short-Term Relief, Long-Term Uncertainties

Economists have adjusted their forecasts in light of the trade agreement. Oxford Economics reduced the probability of a U.S. recession in the coming year from over 50% to 35%, and inflation expectations have been slightly moderated. Despite these adjustments, high tariffs remain on many imports, and ongoing policy volatility continues to inhibit business investment and hiring. Yale Budget Lab estimates show that the average U.S. family will still bear $2,800 in tariff-related costs, down from $4,000. While the deal reduces immediate risks, underlying economic challenges persist.

Retailers, particularly those dependent on Chinese suppliers, are expected to see modest cost savings that could soften inflationary pressures on consumer goods. Walmart and Target, for example, issued statements indicating that the tariff reductions would help stabilize prices on key imports such as electronics, apparel, and home goods. However, executives cautioned that the benefits may be limited unless a more permanent resolution is reached.

Geopolitical Considerations: A Fragile Truce

While the agreement has provided a temporary respite, geopolitical tensions remain a significant concern. Analysts like Macquarie’s Thierry Wizman emphasized that underlying geopolitical issues continue to pose risks to the stability of the trade relationship. The deal's 90-day duration underscores the fragility of the truce and the potential for renewed tensions.

Furthermore, the deal's focus on tariff reductions without addressing deeper structural issues, such as intellectual property protections and market access, may limit its long-term effectiveness. Experts caution that without comprehensive reforms, the agreement may only provide temporary relief.

A senior U.S. official involved in the negotiations, speaking on condition of anonymity, stated that the agreement was designed as a confidence-building measure to create space for more difficult talks. "We’re trying to rebuild a foundation of trust," the official said, emphasizing that issues such as forced technology transfers and state subsidies are still on the table for future rounds.

Sectoral Impact: Winners and Losers

The trade agreement's impact varies across different sectors. Industries reliant on Chinese imports, such as technology and manufacturing, stand to benefit from reduced costs. Conversely, sectors that have been shielded from Chinese competition due to existing tariffs may face increased pressure. Analysts advise investors to monitor sector-specific developments closely to identify potential opportunities and risks.

Small and mid-sized enterprises (SMEs), often disproportionately affected by trade disputes, have responded positively to the tariff reprieve. The National Federation of Independent Business reported a 7-point rise in small business optimism in its latest survey, with many respondents citing the deal as a reason for increased confidence in near-term economic conditions. However, they also expressed concerns about the uncertainty that looms once the 90-day window expires.

While the U.S.-China trade agreement marks a significant development in international trade relations, Wall Street analysts maintain a cautious outlook. The reduction in tariffs provides short-term relief, but persistent economic and geopolitical challenges suggest that the path to a stable and mutually beneficial trade relationship remains complex. Investors are advised to stay informed and prepared for potential fluctuations as the situation evolves.