The S&P 500 Rally Might Be Losing Steam

U.S. equity markets soared on Monday following the announcement of a major trade deal between the United States and China. After months of heightened tensions and retaliatory tariff hikes, the two global superpowers reached an agreement over the weekend during high-level negotiations in Geneva. The outcome was a rare joint statement in which both sides confirmed a 90-day suspension of escalating tariffs and outlined plans to roll back previously imposed levies on each other’s goods.

The S&P 500, which had been under pressure amid fears of a prolonged trade conflict, rose sharply this week. The temporary truce between the world's two largest economies brought a sense of relief and optimism into the markets, which had been weighed down by growing concerns over supply chain disruptions, rising costs, broader geopolitical instability, and rising risk of a global recession.

Key Developments in the Tariff Rollback

According to the details released in the joint statement, the United States has agreed to reduce its tariffs on Chinese imports from the elevated 145% rate set earlier this year to 30% for a period of 90 days. China, in turn, will reduce its duties on U.S. imports from 125% to 10%. The move marks a significant step back from the full-scale trade war that had already disrupted approximately $600 billion in bilateral trade.

While a 20% U.S. tariff linked to China’s alleged role in the flow of fentanyl remains in effect, both nations have emphasized that the overarching goal is to avoid economic decoupling. U.S. Treasury Secretary Scott Bessent stated during a news conference that the agreement reflects a shared consensus and that a mechanism has been established to prevent further escalation. More negotiations and working-level consultations are expected to continue in the coming weeks as the two sides work toward a more permanent resolution.

Investor Confidence Boosted but Caution Lingers

The financial markets reacted quickly and positively to the news. U.S. stock indices have surged, suggesting investor sentiment has improved. The S&P 500 advanced, supported by renewed confidence that the trade war may be abating. The U.S. dollar strengthened against a basket of currencies, while China’s yuan also appreciated, reflecting a broader sense of optimism in global currency markets.

After months of uncertainty and fears of harsher global trade policies, the U.S.-China trade deal has delivered a great relief. While some damage has already been done to global supply chains and economic growth, the general market view now appears to focus on potential normalization and recovery. Fears of recession have diminished despite first quarter U.S. GDP figures dipping in negative territory, allowing investors to move their attention back to long-term fundamentals and corporate earnings.

Broader Economic Implications and the Remaining Risks

Despite the positive momentum, the agreement is not a final trade deal but rather a de-escalation. Significant challenges remain in negotiating a comprehensive and lasting solution to trade between Washington and Beijing. The remaining tariffs, especially those on specific goods such as steel, aluminium, and automobiles remain intact. Additionally, a universal 10% tariff on all U.S. imports still applies, and this may become a permanent fixture in American trade policy.

The temporary nature of the truce means that pressure will continue to mount as the 90-day countdown progresses. The clock is now ticking toward early July, when the current agreement is set to expire. Should negotiations falter or stall, the prospect of tariff hikes returning could again unsettle global markets.

This is especially relevant considering that recent attempts to negotiate bilateral trade agreements with other U.S. allies, including the United Kingdom, have shown that even among friendly nations with relatively balanced trade relationships, deals often take far longer than anticipated. An agreement with China, given the sheer scale of the economic relationship is likely to be even more difficult to finalize.

Rebuilding Market Trust in the Face of Uncertainty

Over the past few months, President Trump's aggressive trade tactics, including sweeping “reciprocal” tariffs have eroded market confidence. Much of the recent volatility has been driven by a lack of clarity and predictability in policy, which has made it difficult for investors and businesses to plan ahead. In the meantime, companies are using the 90-day window to reassess their strategies, explore alternative supply chains, and prepare for various outcomes in the ongoing negotiations.

Source: TradingView

What It Means for the S&P 500 and Broader Market Outlook

As of now, the S&P 500 is trading at a price-to-earnings ratio of around 21 times, suggesting that much of the good news may already be priced in. While the recent rally has lifted investor sentiment, the outlook remains contingent on whether meaningful progress can be made in the next round of trade discussions. A successful outcome could pave the way for further gains in equity markets, while renewed tensions could reignite volatility.

In the short term, the market is likely to focus on signs of continued engagement between U.S. and Chinese officials, as well as any concrete steps toward a more comprehensive agreement. For corporate America, the temporary reduction in tariffs is a welcome relief that may help stabilize earnings projections and reduce input costs.

From a technical analysis perspective, the S&P 500 index bottomed at 4,835 on the 7th of April and has rebounded more than 20% since. The current price action is only 4% below its all-time high of 6,147 and the rally induced by the temporary U.S.-China trade deal appears to be losing steam as the index approaches its key resistance. Despite the sharp rally over the past month, the S&P 500 is flat year-to-date. While a re-test of the previous record high can not be ruled out, higher levels are difficult to be envisaged at this juncture in time amid the current macro backdrop.

Markets Rebound, But Confidence Remains Fragile

Trade data is deteriorating and first-quarter earnings calls were dominated by vague references to "macro uncertainty". Meanwhile, AI-driven enthusiasm supports only select sectors, and weakening fundamentals for small- and mid-cap stocks suggest broader market fragility. While recession fears have eased following the U.S.-China tariff truce, and market calm feels tenuous at best, one unexpected shock could rapidly reset expectations once again.

Conclusion:

Despite a recent rebound in equities and improved sentiment around trade policy, the U.S. stock market may struggle to maintain its upward momentum. The S&P 500 has risen more than 20% from its April low, recovering losses from Liberation Day.

Adding to the concern, earnings forecasts for 2025 have been revised downward from an expected 14% growth at the start of the year to just 8.7% now. Although recession fears have eased, tariffs remain a long-term structural challenge as they are going to be shared across exporting countries, U.S. importers, and consumers.

Overall, while short-term sentiment has improved, we maintain a cautious outlook, as elevated valuations and enduring structural pressures from tariffs are likely to weigh on future market performance.

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