Optimism on tariffs and still-strong economic data are supporting equity markets but much depends on whether tariffs stay “higher for longer”.
Key Market Takeaways
De-escalation optimism on tariffs is alleviating some economic and market concerns. Treasury Secretary Scott Bessent has stated that the current situation with China is “unsustainable” and President Trump has said tariffs on China will come down “substantially”.
Tariff follow-through is key. As of this writing (May 5), Trade Secretary Howard Lutnick stated that the first trade deal had been reached but had not provided details. Meanwhile, effective tariff rates are still 15-20%[1]. Imported vehicles are subject to a 25% tariff, though further tariffs have been rolled back.[2] Elevated Chinese tariff levels are acting as an embargo, affecting supply chains.
Hard data are better than feared, in line with our prior view of a “cooling, not cratering” economy. Domestic demand, investment, and labor markets remain relatively strong, albeit cooling from above trend levels.
We may see further and faster cooling of data if tariffs stay “higher for longer,” however. Sentiment has deteriorated and could prompt pullbacks in consumption and corporate investment. Uncertainty alone is already having some impact, but elevated tariffs remaining in place would be a drag on growth.
Tariff optimism has propelled a strong recovery rally in equity markets but has also pushed valuations back up, so a level of caution remains warranted. The S&P 500 rallied over 10% in ten trading days through May 2nd, taking the NTM P/E ratio to back to over 20x.[3] IF tariffs remain “higher for longer,” we could see more cooling in the economic data, which could hit earnings. Thus, caution is still warranted and modest underweights to equity/risk assets provides a more conservative stance.
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[1] Source: Evercore ISI.
[2] Wall Street Journal.
[3] Factset.
Disclosures
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