The Next Chapter of a Disturbed Year

Michael Grant

April 2025 has proven a textbook case of a market panic and subsequent reversal. In retrospect, it might appear as just one more demonstration of the unpredictable fragility of equities and of the emotional instability of the investment community.

Through late 2024, we referred to the "invincibility syndrome" attached to US equities and its implications for inevitable disturbance. We should have insisted that the fall from grace could hardly occur without drama: the disintegration of global sentiment around America's financial supremacy has been spectacular.

The commentary (naturally) is all about Trump, who cultivates the cult of his recklessness. Recent weeks have shown that his revisionism is constrained by financial markets and by the requirement of avoiding evident distress on Main Street. To this extent, democratic constraints are functioning well in America.

Some complain that the trial-and-error process of policy formulation is unnecessarily disruptive. Yet, the exaggeration serves a purpose: the spectrum of views and prescriptions acceptable to the political mainstream in the West is shifting in the direction of the Trump agenda.

Our diagnosis has not changed. The call of an authentic recession in the US is premature. Most data has been encouraging, exemplified by the April payroll report. Although confidence measures have plunged, retail sales have not yet been affected. Bank lending is resilient, and the widening of credit spreads is comparatively modest.

Corporate results also indicate that damage has not yet been substantial. In our view, tariffs are largely a tax on corporate margins, here and abroad. With US margins at historic highs, most will absorb the bulk of this tax—not the consumer. The tariff impact on broader US inflation is grossly overestimated.

An Intractable Antagonism

The White House and Beijing would both like to de-escalate their stand-off, yet the obstacles to a breakthrough agreement appear formidable. At the heart of deglobalization is the strategic realignment by America as it aims to isolate China from the West and its allies. In our view, this will be permanent.

After decades of negotiations, the US and UK struck a trade deal that contains the seeds of the American agenda: ending the most-favored-nation principle that has been decisive for China’s rise in the global trading order and aligning with US security priorities on trade. China has the most to lose on both counts.

The trade embargo has been more painful for the Chinese economy than the financial press is letting on. What is often (and wrongly) described as “strategic patience” by China’s leadership is simply the absence of policy options. Understanding the different “pain curves” between the two litigants provides important insights.

The democratic constraints upon Trump have emerged as quick and heightened domestic sensitivity to his policies—all in the public arena. Unsurprisingly, the Chinese political system has allowed its leadership to outlast Trump, for now. This differing arc of pain is captured by the common notion that Trump “blinked first.”

But Trump now has what he needs—no material impact upon inflation, no empty shelves, and no US recession, all confirmed by the messages of Mr. Market. Meanwhile, the Chinese economy faces an uphill battle. Today’s policy stimulus is pulling forward demand from 2026 while additional tariffs of “only” 30% reinforce its deflationary narrative.

Trump was initially more vulnerable in this contest, but China now has a rising incentive for a broader deal. As tariffs are lowered from their worst levels, the internal credibility for blaming Trump for China’s woes becomes more limited. Meanwhile, current tariffs of 50% (20% prior, 10% reciprocal, 20% fentanyl) are damaging.

Trump’s priorities are obvious to Beijing: He wants TikTok, he wants the reshoring of manufacturing, and he wants trade concessions to flow to constituencies that will help him in the mid-term elections. This starts with Boeing jetliners, soybeans, and natural gas. Fentanyl and TikTok are not part of trade, but they are part of The Art of the Deal.

Our base case: The latest suspension of tariffs (24%) will be extended for an additional 90 days, allowing Trump and Xi to sit down at the sidelines of the UNGA in September. At that point, the Art of the Deal will be center stage. China is loath to sell TikTok to a US buyer – but swallowing this in exchange for the 20% tariff on fentanyl may be worth it.

Summary

Our view is that investors will have to live with fluctuating recession anxiety in America for some time. The US is experiencing the hangover from the excess growth produced by the historic policy stimulus of the pandemic. Congress is unlikely to introduce new measures of support before the end of the summer.

For now, the legacy of the early April plunge in equity values is widespread apprehension and warnings of a recession and bear market in the US. A deal with China will force a capitulation of this sentiment in late Q3, particularly if nominal US economic activity appears resilient.

Importantly, Trump is not an ideologue on foreign policy. His agenda of “Peace and Business” implies he can be satisfied with commercial engagement, which contrasts with Biden’s prioritization of strategic and political dimensions to this rivalry. Trade uncertainty will dominate sentiment into autumn, but there are silver linings.

Tactically, some pullback for US equities seems inevitable. Yet, most investors have missed this rally—any correction may be more of a sideways consolidation than a traditional “sell in May and go away.” Into summer, markets could test new highs if our two premises are correct: trade negotiations make progress and recession does not materialize.