The market's mirage: Investors might be misreading the trade truce
May 14, 2025
Markets surged on this week’s
de-escalation in the U.S.-China trade war
. But the so-called “breakthrough” is riddled with caveats — and investors may be celebrating too soon.
To hear many on Wall Street tell it, the global economy just
dodged a bullet
.
Stocks soared
. Treasuries rallied. Analysts at Wedbush called it a “dream scenario.” But beneath the market’s exuberance lies a messier reality: The trade war isn’t close to over, and the “deal” investors are cheering may be less a breakthrough than a well-branded pause.
While markets have responded to the 90-day tariff pause and reports of a trade deal framework with optimism — the S&P 500 rose 3% Monday after the truce and added 0.7% Tuesday before a flat Wednesday — much of that optimism appears to be based on overly generous readings of the agreement’s implications. With few concrete concessions from China, key sectors still exposed to high tariffs, and vague language around enforcement, the risks of a trade war relapse remain high.
“I think this rally is just too much too fast until we get more specificity as far as what the real trade terms are going to be, what they may have as far as impacts on the economy overall, as well as what individual companies will be affected and which ones aren’t,” Dave Sekera, Morningstar’s chief strategist, said in a note Monday.
The U.S. has agreed to lower its tariff rate on Chinese imports from 145% to 30% (a figure that includes previously imposted fentanyl-related tariffs), while China has lowered its duties from 125% to 10% and offered vague commitments to resume negotiations on other key trade issues. There’s no enforcement mechanism. And no resolution on key issues such as intellectual property protections or AI-related export bans.
Perhaps most important, the 90-day pause leaves the door open for the sky-high tariffs to return if talks falter.
Analysts at Jefferies described the move as more PR than policy, writing that it suggests “the U.S. is more desperate than China to deliver the ‘de-escalation’ message to the market.”
In other words: The optics may matter more than the outcomes.
Investors may be celebrating a ceasefire, but the underlying structure of President Donald Trump’s tariff regime hasn’t changed. It’s still built on unilateral authority, maximum optionality, and the idea that volatility is a feature, not a bug. As the Jefferies analysts put it, this is a classic case of “‘raise price and then discount” — a tactic that can soothe markets in the short term, but leaves companies, allies, and adversaries alike uncertain about what’s next.
Wall Street’s rally may be running on fumes
Not everyone around Wall Street is skeptical.
Goldman Sachs (
GS
) reduced its estimated probability of a U.S. recession from 45% to 35%, while JPMorgan Chase(
JPM
) now places the likelihood of a recession at below 50%. Barclays (
BCS
) has dismissed recession risks entirely. Wedbush analysts called the trade announcement “very bullish news for the tech trade,” saying in a note that supply chain concerns would now be “significantly reduced.” They called it “a huge win for the bulls and a best-case scenario.”
But even as tech stocks rally, there is no sign that either country plans to unwind deeper restrictions on semiconductors, quantum computing, or AI components — the very technologies that define long-term strategic competition. Commerce Secretary Howard Lutnick has taken a hardline stance on national security-related tech, pledging a “dramatic increase in enforcement and fines” for export control violations. He has also signaled that such controls will now be baked into future trade negotiations.
Some investors, however, are taking the view that any deal — however flimsy — is still better than no deal. “The market is going to take great comfort in the idea that there is a way forward and that all-time highs in the stock market are achievable before yearend,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, wrote Monday.
Gina Bolvin, president of Bolvin Wealth Management Group, echoed some of the optimism, writing in a Monday note that, if the deal sticks, “this is a big WIN for Trump, for stocks, and for investors,” She added, “This is why we tell our clients not to trade [on] headlines.”
Other analysts were more blunt.
“This is a de-escalation, not a trade deal,” wrote Jeff Buchbinder, chief equity strategist for LPL Financial (
LPLA
). “More work remains to be done. A pause isn’t permanent.”
Buchbinder pointed out that the underlying tariff structure remains largely intact. The 30% levy “is still high enough to keep overall tariff rates in the low teens,” he wrote — suggesting that the market’s excitement may be a bit overdone. “The risk remains that tariffs go back up from current levels.”
He said in an interview that his firm is “kind of waiting and seeing” because a lot of big moves retrace.
“We think we’re gonna get a dip,” he said. “The message coming out of the White House has been clearly that they believe in tariffs and that these aren’t just going to go away as part of a negotiation.”
Whiplash risk looms
Sure, the lowered rates are attractive, but investors may be forgetting who’s at the wheel. Trump has a well-documented habit of policy whiplash, especially when headlines or polling shift. The tariffs themselves have been a case study in volatility: imposed, threatened, dialed up, walked back, and now reframed as leverage in a deal that remains largely theoretical.
Investors banking on a smooth path forward may be underestimating just how quickly the president’s strategy can reverse. If talks with China stall again in July, a tariff re-escalation is hardly off the table.
“Trump announces tariffs, so markets fall. Trump walks back tariffs, markets rise,” University of Michigan economist Justin Wolfers said on CNN. “If this is a way of writing a TV show, it’s a pretty compelling script, and I’m watching it pretty closely. But if this is a way of managing the economy, it doesn’t make any sense.”
Markets may be trading on the headlines — but many businesses are living with the fallout. For small companies operating on razor-thin margins, a 30% tariff is still a major burden. Higher import costs, especially for key components from China, continue to strain budgets already under pressure. And small businesses largely don’t have the scale or capital to hedge, stockpile inventory, or rapidly switch suppliers.
At the macro level, the consequences are just as real. Tariffs, even at reduced levels, are inflationary by design. They put upward pressure on consumer prices and complicate the Fed’s efforts to bring inflation down to its 2% target. Federal Reserve Vice Chair Philip Jefferson said Wednesday that
the tariffs were likely to push inflation higher
in the near term, raising the stakes for monetary policy decisions.
U.S. companies also now face disadvantages versus foreign competitors that aren’t subject to similar tariffs (namely in Europe and Southeast Asia) and the result is an uneven playing field. As American firms recalibrate, cut back on hiring, or pass costs on to consumers, the risk of an economic slowdown rises.
Peter Dutton, a senior fellow in the Paul Tsai China Center at Yale Law School, said that this deal-making isn’t going to end any time soon. “I see this as just the beginning of a process of stabilizing economic components of the relationship,” he said, “and it’s likely to be a long and steady process.”
So while the market may be sprinting ahead, the track is still being laid.
