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The hiatus in the trade war gave new legs to the stock market’s rally.
After falling 23% into a bear market, the Invesco QQQ Trust, Series 1 (QQQ) – which tracks the Nasdaq-100 – is now up 24% off the lows.
That means the Nasdaq entered bull market territory in just over a month. The S&P 500 is also positive on the year after being down as much as 21% from the peak.
The bottom happened in early April after President Trump paused a massive round of tariffs.
And positive news on the trade war front is driving further market upside. The catalyst for the most recent jump was easing tensions between the U.S. and China.
President Trump announced a trade deal with China over the weekend.
The growing trade war had boosted recession fears and driven stocks lower. Now those concerns are now fading.
But investors’ hope for a quick resolution to the trade war is misplaced…
A Pause… Not a Deal
The stock market recovered the entire decline following Trump’s “Liberation Day” tariff announcement.
But the risk of tariffs and trade tensions impacting the economy and corporate earnings remains high.
Although Trump called it a deal, there’s actually no deal with China at all.
The U.S. and China did not reach an agreement. The “deal” is simply a pause on the astronomical tariffs against each country’s imports.
The U.S. rolled back tariffs on Chinese imports from 145% to 30%. China is reducing tariffs on U.S. imports from 125% to 10%.
And a hold on more drastic tariffs is in effect for 90 days while both sides work on a truce.
That means the market faces more risk than most investors are expecting. And the stakes are high, as each country is looking for leverage in trade negotiations.
Vitally, the U.S. relies on Chinese manufacturing for everything from smartphones to appliances and other goods.
But an even larger threat looms over U.S. companies and corporate earnings…
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The Overlooked Risk
Last year, the U.S. imported $439 billion worth of goods from China. But China imported only $144 billion worth of goods from the U.S.
That means there is a $295 billion trade deficit with China.
Trump’s tariffs aim to address the trade imbalance. But Chinese demand shows up in other ways that can impact the stock market.
For instance, Apple sold 43 million iPhones in China last year. Starbucks operates 7,594 stores in the country. McDonald’s has 6,820 restaurants… and the list of examples goes on.
For companies in the S&P 500, China generated $1.2 trillion in revenue. That’s 7% of the total annual revenue for the S&P 500. The amount of revenue China generates for large-cap stocks dwarfs the trade deficit, as you can see in the chart below.
While the trade imbalance is in focus, investors shouldn’t lose sight of Chinese demand’s impact on S&P 500 sales.
Any risk to that revenue also jeopardizes earnings per share. With the recent rally in the S&P back toward record highs, an expensive valuation makes stock prices sensitive to any deterioration in the outlook.
That’s exactly why stocks plunged so quickly as trade fears ramped higher.
With no deal in place and relations staying tense, you should continue to expect plenty of headline-driven volatility in the stock market.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. If you enjoy this e-letter, then I hope you’re checking out my new podcast, Trading With Larry Live. You can tune in at 8:30 a.m. ET, Monday through Thursday, to watch live premarket analysis and market commentary from me and one of my analysts.
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