U.S.-China Trade Truce: What’s Next? - Thoughts on the Market

Summary4 min read

Podcast Summary: U.S.-China Trade Truce: What’s Next?

Title: Thoughts on the Market
Host/Author: Morgan Stanley
Episode: U.S.-China Trade Truce: What’s Next?
Release Date: May 12, 2025

Introduction

In the May 12, 2025 episode of Thoughts on the Market, Morgan Stanley's Chief Investment Officer and Chief U.S. Equity Strategist, Mike Wilson, delves into the recent developments in U.S.-China trade negotiations and their implications for the equity markets. The episode provides a comprehensive analysis of the current trade truce, its sustainability, and the broader economic factors influencing investor sentiment.

Progress in U.S.-China Trade Negotiations

Mike Wilson opens the discussion by addressing the recent advancements in the U.S.-China trade negotiations. Highlighting the unexpected progress over the weekend, he notes that both nations have agreed to a detente in the trade war that had escalated just a month prior.

“Over the weekend, US China trade negotiations made better than expected progress, with both sides agreeing to a detente in a trade war that began just one short month ago.” (00:30)

Wilson acknowledges that while the initial agreement is a positive step, investors are questioning the durability of this truce and whether it signifies a pathway to long-term stability.

Implications for Equity Markets

Shifting focus to the equity markets, Wilson emphasizes that investors should consider the future uncertainties and the potential rate of change in growth variables rather than just the immediate outcomes of the trade negotiations.

“Equity markets trade in the future. Therefore, the question to ask yourself is do you think things will be more or less uncertain in six months and will they be better or worse?” (01:15)

He points out that the recent increase in earnings revision breadth—a key indicator for stock prices—signals a positive trend. This uptick was partly due to a surge in demand in the first quarter before the tariff announcements, leading to better-than-expected earnings.

“Earnings revision breadth showed a meaningful uptick last week for the first time this year.” (01:45)

Additionally, the weaker dollar has bolstered earnings for leading companies, and the translation benefits for U.S. multinationals are expected to serve as a significant tailwind over the next six months.

Market Sentiment and Historical Context

Wilson draws parallels with historical market behaviors, referencing "Liberation Day" as a pivotal moment of negative sentiment which, according to him, marked a market bottom. He suggests that the recent positive developments in trade negotiations might lead to a temporary pause in market rallies.

“Markets tend to top on good news, and this weekend's better than expected outcome on trade negotiations with China could very well lead to a pause in the rally.” (02:30)

This perspective aligns with the adage that equity markets often bottom on bad news and peak on good news, underscoring the cyclical nature of market sentiments.

Economic Policy Changes and Future Outlook

Looking ahead, Wilson discusses potential growth-positive policy changes that could further influence the markets. These include possible extensions of tax cuts, deregulation efforts, and resolutions concerning the debt ceiling and budget appropriations for the upcoming year.

“Markets can look forward to the possibility of growth positive policy changes that still may be in front of us.” (02:50)

He also touches on the Federal Reserve's potential role in this evolving landscape. With the escalation of tariff rates now lessened, the Fed might consider implementing rate cuts earlier than previously anticipated, which could have significant implications for inflation and economic growth.

“The Fed can also come back into the picture with rate cuts sooner than perhaps what the Fed told us last week.” (03:10)

Investment Strategy and Recommendations

Concluding his analysis, Wilson reaffirms Morgan Stanley's original outlook of a challenging first half of the year followed by a robust second half. This perspective is rooted in expectations of decelerated AI capital expenditure growth and initial growth-negative policy impacts, which are now being counterbalanced by upcoming growth-positive policies and productivity gains from existing AI investments.

“Bottom line, I feel more confident in our original outlook for this year for a tough first half followed by a strong second one.” (03:25)

He advises investors to adopt a strategic approach by "buying the dips" rather than chasing stocks, especially in light of the anticipated sustainable rotation towards lower-quality cyclical stocks and a resurgence of investor confidence.

“After such a strong rally, pullbacks are inevitable but unlikely to be anything like we saw last month. So buy the dips.” (03:40)

Conclusion

Mike Wilson encapsulates a cautiously optimistic view of the current market dynamics, emphasizing the importance of strategic investment decisions amidst evolving trade relations and economic policies. By focusing on future uncertainties and potential growth trajectories, he provides investors with a nuanced framework to navigate the complexities of the equity markets.

Note: Sections containing non-content elements such as advertisements, introductions, and disclaimers have been intentionally omitted to maintain focus on the substantive discussions presented in the episode.

Timestamp Reference

00:30 – Overview of recent U.S.-China trade negotiations.
01:15 – Importance of future uncertainties in equity markets.
01:45 – Earnings revision breadth uptick.
02:30 – Historical market sentiment and "Liberation Day."
02:50 – Anticipated growth-positive policy changes.
03:10 – Federal Reserve's potential rate cuts.
03:25 – Morgan Stanley's market outlook.
03:40 – Investment strategy recommendation: buying the dips.

This summary is intended to provide a comprehensive overview of the podcast episode for those who have not listened to it, encapsulating all key discussions, insights, and conclusions presented by Mike Wilson.

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Transcript2 lines

[00:01]
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist. Today on the podcast I'll be discussing how to think about the recent tariff negotiations for equity markets. It's Monday, May 12th at 11:30am in New York, so let's get after it. Over the weekend, US China trade negotiations made better than expected progress, with both sides agreeing to a detente in a trade war that began just one short month ago. The main question I'm getting from investors is whether they should trust this initial agreement and if it will eventually lead to something more sustainable. From my perspective, this misses the more important point for equity investors. To remind listeners, equity markets trade in the future. Therefore, the question to ask yourself is do you think things will be more or less uncertain in six months and will they be better or worse? The other thing to consider is that stocks trade on the second derivative or rate of change in growth. On that score, I believe it's likely. We saw the trough rate of change in variables that tend to correlate with stock prices the most. More specifically, earnings revision breadth showed a meaningful uptick last week for the first time this year. Some of this was driven by a pull forward in demand during the first quarter ahead of the tariff announcements that led to better than feared earnings. In addition, several leading companies posted better than expected results thanks to a weaker dollar. Importantly, the translation benefit for US Multinational earnings is likely to be a big earnings tailwind for the next six months. Many of the growth negative things we were worried about five months ago have played out now, with Liberation Day marking the point of maximum negative sentiment and positioning. There is an adage that equity markets bottom on bad news, and I can't think of a better example of that than Liberation Day last month. Similarly, markets tend to top on good news, and this weekend's better than expected outcome on trade negotiations with China could very well lead to a pause in the rally. Therefore, we would buy dips rather than chase stocks. On days like today, markets can look forward to the possibility of growth positive policy changes that still may be in front of us. Things like tax cut extensions, deregulation and resolution of the debt ceiling and budget appropriations for the next year. Finally, with the threat of further escalation of tariff rates now diminished, the Fed can also come back into the picture with rate cuts sooner than perhaps what the Fed told us last week. While we don't exactly know how much the tariffs will impact inflation over the next year, it is likely to be front end loaded. In fact, there's a case to be made that tariffs may hurt demand and end up being disinflationary. The Fed is likely to determine this outcome over the summer and and could begin to at least signal rate cuts. Such a move will potentially lead to a more sustainable rotation towards lower quality cyclical stocks and drive animal spirits in a way that many investors were expecting six months ago but simply jumped the gun. Bottom line, I feel more confident in our original outlook for this year for a tough first half followed by a strong second one. This outlook was based on our view that AI capex growth was bound to decelerate this year, while policy changes were likely to be growth negative to start. Now we can look forward to growth positive policy changes and productivity benefits from the spending on AI that's already taken place. After such a strong rally, pullbacks are inevitable but unlikely to be anything like we saw last month. So buy the dips thank you for choosing to listen. Leave us a review and let us know what you think about the podcast. If you enjoy listening to thoughts on the market, tell a friend or colleague about us today.
[03:46]
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