Weekly market commentary

The U.S.-China deal represents a major de-escalation in the trade conflict. Three key takeaways? First, it reaffirms that the hard economic rules we’ve been flagging will shape policy. Second, tariffs will likely bring more supply-driven contractions in quarterly activity, but the cumulative impact on overall 2025 activity could be more limited. Third, the deal gives a sense of where the U.S. effective tariff rate will settle. We stay risk on, monitoring corporate earnings reports for selective opportunities.

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Room to fall
S&P 500 earnings estimate revisions and manufacturing PMI, 1990-2025

The 90-day cut to U.S.-China tariffs shows a hard economic rule shaping policy: supply chains can’t be rewired quickly without disruption. That’s reflected in both nations’ explicit goal of avoiding economic “decoupling.” We still think tariffs will up inflation and hurt growth, with recession-like effects in coming quarters. Earnings estimates often suffer steep cuts when activity slumps. See the chart. Analysts have already cut forecasts for broad S&P 500 earnings growth from 14% in January to 8.5%, a slightly bigger drop than in an average year, per LSEG data. Yet the cumulative impact on overall 2025 activity may be more limited. The U.S. average effective tariff rate could land around 10-15%, we estimate, higher than at the start of 2025 but a more manageable economic disruption. We stay positive on developed market (DM) stocks and see mega forces creating select opportunities.

As we track how evolving tariffs ripple out, we see three key themes in Q1 earnings reports. First, moving production to the U.S. or countries on better terms with the U.S. has, for the first time, been discussed on all Q1 earnings calls so far, per Alphasense data. Some are now giving timelines. Second, many firms look set to accept higher input costs as supply chains adjust. The latest external estimates see tariffs denting net earnings by around 5%. Third, 60% of companies updating their spending plans are now guiding below consensus forecasts – up from 40% at the start of the year but still below the 71% hit in the pandemic, Bank of America and FactSet data show. Yet opportunities persist in certain sectors. Big tech is reaffirming or upping AI-linked investment, for example. And Q1 results show U.S. companies are starting from a position of strength.

What we like

In Europe, infrastructure and defense spending plans have led us to upgrade European equities to neutral. Yet execution of those plans is key – and the new German chancellor’s limited coalition support highlights potential obstacles. Europe’s Stoxx 600 has performed broadly on par with the S&P 500 since the April 2 tariff announcement and European earnings estimates for 2025 have fallen to 3.5% from 8% in January. Yet that masks divergence. Financials are up over 20% this year, thanks to persistently high yields and strong company and household balance sheets. We’ve preferred Spain since the start of 2025 due to strong growth and exposure to financials, utilities and infrastructure – sectors that benefit from mega forces. Spanish stocks are also less exposed to U.S. tariffs: only 5% of its exports are U.S.-bound, less than the EU average, trade data show. Japanese equities offer another bright spot: Ongoing corporate reforms keep us overweight on a currency-unhedged basis.

Structural shifts also call for selectivity in other asset classes. Gold has been a better buffer against geopolitical risks than other traditional safe-haven assets since April 2. It has soared, while long-term U.S. Treasuries and the U.S. dollar have – unusually – slid alongside stocks, Bloomberg data show. Under new regulation, U.S. banks will soon be able to treat gold as a high-quality asset on their balance sheets. That could drive demand and make gold a core holding.

Our bottom line

We still see supply disruptions upping inflation and hitting growth, but also a path to avoiding a U.S. contraction over 2025 as a whole. Mega forces, greater fiscal spending and higher interest rates are driving select opportunities.