03 Jun 2025
Trade tensions bring US to the negotiating table
Your monthly market outlook from atomos.
Monthly Market Outlook
03 Jun 2025
Your monthly market outlook from atomos.
Monthly Market Outlook
Monthly Market Outlook
The United States is sitting down with its key trading partners to hammer out trade deals, following April’s ‘Liberation Day’ tariff announcement that shocked markets.
The US has made deals with the UK and China on trade, while the UK and EU have also come to an arrangement. These trade deals are important for investors and for global economic growth.
On 12 May, the US and China agreed to pause their escalating trade war for 90 days, drastically reducing previously announced tariff hikes. Instead of a punishing additional 145% tariff on Chinese imports, the US will now impose a 30% rate, while China will levy 15% on US imports instead of a whopping 130%. While this truce may only last three months, it shows that the two nations are both willing to negotiate to avoid further damage to their economies.
This deal came just in time. The US’s planned tariffs were so high that they would have effectively blocked trade with China on many essential goods, threatening serious supply chain disruption, shortages, and spelling bad news for economies and businesses.
While we thought it unlikely policymakers would allow this to happen, the announcement has removed this risk.
The terms of the deal were in fact better than many had hoped - it substantially reduces the risk of recession in the US and/or several years of high inflation. If recession does happen, it is more likely to be shallower and shorter-lived. Financial markets reacted well to the agreement, with US equities rallying strongly.
Keeping up the positive flow of news that has improved investor sentiment, a US Court has ruled that all the US ‘reciprocal’ tariffs announced on 2 April are unlawful and issued an injunction against them. Does this mean that tariff risks and uncertainty are over? Unfortunately, not. The court ruling relates to the legislation used to justify the tariffs. In other words, it is the process used to implement the tariffs that is unlawful, not the tariffs themselves. The Trump administration will appeal the decision and, if unsuccessful, there are plenty of other channels it can use to enact the same tariffs.
The chart below shows that the effective tariff rate on US imports is rising to a 100-year high. The effective tariff rate is the average amount of tax the US government actually collects on imported goods, expressed as a percentage of the total value of those imports. It gives a real-world picture of how much import taxes are actually affecting trade.
‘Special relationship’ tested
Elsewhere, the UK and US have struck their own bargain, known as the ‘US-UK Economic Prosperity Deal’. This was the first trade deal to be struck since President Trump’s‘Liberation Day’ tariff announcements on 2 April. This agreement scraps tariffs on British steel and aluminium and significantly reduces the cost of exporting British cars to the US. The economic impact on the UK will be quite modest, but the deal is still symbolically important. It sends a signal to the world about the future US tariff framework.
Later in May, the UK and EU announced a smaller deal that focused on co-operation in security and defence, and some trade in food and energy. This agreement is less significant for markets and the economy, as government estimates suggest it will only bring a small boost to UK GDP by 2040.
The most important aspects of the US-China and US-UK deals are the signals to the world about the future US tariff framework. For example, despite the supposed ‘special relationship’ the US and UK have historically enjoyed, the US is still imposing a 10% tariff on most UK products. This is important for our global outlook. It does not bode well for other US trading partners, who will likely see their tough new tariffs maintained. It means that trading with the US will become much more expensive, which is a drag on economic growth and company profitability. Finally, it also suggests there are still risks of some countries or sectors ending up with higher tariffs than they face currently if deals can’t be reached.
Equities: Bear market or bounceback?
After falling into bear market territory (meaning a drop of more than 20%) between February and April, US stocks have now recovered most of their losses. Investors are clearly feeling more confident about stocks. Three things have been driving this positive feeling: a steady scaling back of tariffs since 2 April, strong company earnings reports for the first quarter of the year, and a better-than-expected outlook for the second quarter of the year.
Corporate earnings have been surprisingly robust across many different sectors and business types, which has helped create a more stable foundation for the market. But risks haven’t disappeared – trade policy is still uncertain and will remain an important area of focus over the next few months. While some tariffs have been cut or delayed, overall, tariffs are still rising sharply and it is certainly still possible that trade wars could reignite. The recent announcement by President Trump of a 50% tariff on the EU, which was quickly postponed, is a good example of how volatile the policy environment remains.
Looking ahead, we expect US and European economic growth to slow in the second half of the year as businesses grapple with an uncertain environment. This could feed into lower business investment, a cooling labour market, falling share prices and stock market volatility. If this slowdown tips the market back into a downturn, how deep could it go?
Goldman Sachs research defines three types of bear market:
Until now, we have been in an event-driven equity market. By mid-April, the major risks investors were worried about had largely been resolved, and markets responded positively. But we should not get too comfortable. There is still a chance that the fallout from those events could cause more uncertainty. If economic growth keeps slowing, we could see a more traditional downturn emerge: a cyclical bear market. If this happens, it will mean more stock market falls in the short term. The good news? History shows us that stock markets usually bounce back to their previous highs within four to 13 months.
While any short-term falls in equity markets are unnerving, longer-term investors should be able to look through any short-lived market swings.
What corporate earnings can tell us about the state of the world
We have just finished the latest US earnings season, when companies report their performance and profitability over the first three months of the year. US businesses have shown stronger-than-expected results, led by the biggest technology firms, known collectively as the ‘Magnificent Seven’. This group still accounts for a significant share of overall earnings growth. Nearly all the seven companies beat earnings expectations and reaffirmed their plans for major AI-related investments this year, which should help support the US economy.
There is some differentiation within the tech sector though – companies focused on software and cloud-based services pointed to healthy demand, while companies tied to consumer goods and retail reported cost pressures and weaker demand.
It’s clear that uncertainty is weighing on businesses – fewer companies than usual have issued guidance on their future earnings, and many chose not to revise previous forecasts. There were also more cuts than increases to capital spending plans as businesses tightened their belts. While we are not expecting to see widespread job cuts, a slowdown in hiring looks likely.
Notably, the number of companies mentioning ‘recession’ in their earnings calls jumped sharply - from just 2% last quarter to 24% so far this season. This aligns with our view of a likely slowdown in US growth in the second half of the year.
All of this combined suggests a more cautious business environment as companies wait to see how trade policy evolves for the rest of this year. Investors will also be watching closely.
Information correct as of 2nd June 2025
Disclaimer
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
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The value of investments and any income from them can fall and you may get back less than you invested.
The value of investments and any income from them can fall and you may get back less than you invested.
