by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently focused on analyzing the latest slew of economic data. In sports news, fans are celebrating as the Minnesota Timberwolves secured their spot in the NBA Western Conference Finals. In today’s Comment, we’ll examine the sources of the market’s growing optimism, the underappreciated strategic depth behind Trump’s negotiation tactics, and other notable market developments. We’ll conclude with our regular roundup of international and domestic data releases.

Market Optimism: The initial shock from the tariffs appears to be fading, with the market increasingly reflecting a risk-on sentiment.

• Since the president’s controversial Liberation Day announcement, which imposed steep tariffs on key trading partners, the S&P 500 has not only fully recovered its initial losses but has now climbed above its 200-day moving average. This rebound reflects improving market sentiment, as investors grow increasingly confident that the administration may adopt a more flexible approach than initially feared when the tariffs were introduced.
• Following progress in trade negotiations with the UK and China, the US announced on Thursday that additional countries have shown willingness to engage on some of the president’s key trade concerns. On Thursday, he revealed that India is considering eliminating all tariffs on US goods. Meanwhile, there have also been discussions suggesting that EU officials are increasingly confident about reaching a deal with the Trump administration.

• Following progress in trade talks, we have seen investors return to the momentum trade that drove the S&P 500 higher in 2023 and 2024. Notably, investors have rushed back into AI-related firms amid optimism that demand for new technology will fuel strong earnings growth over the coming years. The most significant gainers have been Tesla and Nvidia, which both have surged roughly 23% since April 2.
• Investors increasingly believe the president will adopt a more pragmatic approach to tariffs moving forward — a shift many interpret as a sign that the worst may be over. As a result, markets have begun pricing in the prospect of future trade progress, which could significantly benefit US firms. While it is still too early to confirm whether this optimism is justified, sentiment is likely to hold as long as the administration signals no further escalation in tariffs beyond current levels.
• Consequently, we believe it may be prudent to begin cautiously testing the market, particularly by targeting companies with minimal supply chain risks and strong earnings potential. These firms are likely to show the most upside risk as long as the economy continues to grow. That said, there are still risks that are hard to quantify; therefore, a wait and see approach is still the safest.

Trump’s Strategy: While the president’s trade policies may appear volatile, there may be more strategy at play than many realize.

• His decision to impose steep tariffs on fentanyl-related imports from allies and China caught markets by surprise. At the time, many had underestimated his willingness to escalate a trade war due to the impact it would have on equities. As a result, the tariff led to an immediate market sell-off. This move put other countries on notice that he meant business but also forced companies to stockpile goods and brace for further disruptions.
• Next, he imposed sky-high tariffs on nearly all major trade partners, redefining a “trade cheat” not as a country exploiting the system, but simply as any nation running a surplus with the US. By pushing tariffs to extreme levels, he reshaped market expectations of how high tariffs could go, while reinforcing his broader goal of fundamentally restructuring US trade relationships.
• Then, in a tactical pivot, he slashed tariffs to a flat 10% — still triple pre-trade war levels but significantly below his initial demands. This triggered another round of inventory hoarding while boosting government tariff revenues and showcasing their viability as a fiscal tool. More importantly, it delivered an unambiguous warning to trade partners that access to the US market now comes with strings attached.

• Meanwhile, China’s tariffs were maintained at effectively prohibitive levels, compelling Chinese exporters to divert goods to alternative markets. This deliberate oversupply strategy served a dual purpose as it demonstrated the disruptive consequences of Chinese export dominance while creating economic incentives for other countries to align with US efforts to restrain China’s trade practices.
• The US strategically reduced Chinese tariffs to triple the standard rate applied to other nations in a calibrated move that maintained China’s status as the primary trade-policy target. This triggered two key effects: (1) an immediate surge in imports as companies raced to rebuild inventories, boosting tariff revenues; and (2) sustained pressure on US firms to accelerate supply chain diversification away from Chinese manufacturing hubs.
• While this breakdown omits many nuances and certain events, the key takeaway is clear: The president’s tactics, though unorthodox, serve deliberate goals. The trade war is unlikely to end soon, but the volatility itself has secondary benefits such as generating revenue through inventory surges, which could sustain growth longer than many realize. While the ultimate outcome of these policy shifts remains uncertain, there are strong indications of a broader, calculated strategy at work.

Tax Bill Gets Uncomfortable: Republican lawmakers are expected to have a tax bill by July; however, there still seems to be a lot of disagreement over the details.

• Republican lawmakers from high-tax states are set to gain a significant tax concession, with a proposed bill raising the State and Local Tax (SALT) deduction cap to $80,000. This compromise follows threats from several Republicans to block extensions of Trump-era tax cuts unless the deduction — capped at $10,000 since 2017 — was increased. The negotiated change, if enacted, would represent a notable win for moderates in high tax states.
• The House has advanced a bill that would impose steep cuts to Medicaid. Key provisions include imposing work requirements (with specific exemptions) for childless adults aged 19 to 64, eliminating states’ ability to tax healthcare providers for Medicaid funding, and penalizing states offering Medicare access to individuals without legal status. While some conservative lawmakers have expressed concerns about these changes to social programs, it remains unclear whether they have sufficient votes to block the bill.
• The proposed increase in the SALT deduction cap, combined with spending restrictions on Medicaid, will likely result in a narrow passage in the House but spark a more contentious debate in the Senate. While the legislation is still expected to pass, further amendments may be introduced to mitigate its political fallout. That said, the bill’s enactment would likely be supportive for equities.

Trump Deregulation Push: The White House is set to start rolling back bank rules in a win for the financial industry.

• Regulators are expected to lower capital requirements for banks in a move that could affect their lending capacity. Specifically, they plan to reduce the supplementary leverage ratio (SLR), a rule mandating that large banks maintain a minimum level of high-quality capital relative to their leverage. This ratio acts as a buffer against liquidity shortages during periods of financial stress.
• The financial industry has consistently opposed the rule, arguing that its capital requirements not only constrain lending to households but also discourage banks from acting as stabilizers in the Treasury market. By including Treasury securities in the leverage ratio calculation, the rule limits banks’ ability to absorb shocks during periods of bond market stress — a weakness starkly exposed during last month’s volatility.
• The easing of financial regulations is expected to provide a meaningful boost to economic activity. By reducing capital constraints on banks, the policy shift should expand credit availability, enabling households to secure financing more easily and supporting a rebound in consumer spending. This rule change should help support the broader economy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Financial markets are still in a good mood following the latest deals from the Trump administration. In sports news, fans are celebrating the Indiana Pacers’ victory over the Cleveland Cavaliers that secured their spot in the Eastern Conference Finals. Today’s Comment will examine the latest inflation data, important tax policy developments, and other market-moving news. As always, our report will provide comprehensive summaries of both domestic and international economic data releases.

Where’s the Tariff? Inflation was softer than expected, signaling a continued downward trend in underlying price pressures that began before the tariffs took effect.

• Overall, US consumer prices increased by 2.3% year-over-year, down slightly from the previous month’s 2.4% and well below the 3.0% reading at the start of the year. The decline was driven by a sharp 11.5% drop in energy prices compared to the prior year, along with a monthly decrease in food costs. Excluding food and energy, Core CPI held steady at 2.8% for the month.
• The most encouraging aspect of the report is the continued downward trend in services inflation, signaling a return to normalization. The year-over-year change in the index has declined for six consecutive months, with the deceleration primarily driven by shelter costs — a key inflationary driver. This moderation in shelter prices has played a major role in bringing overall inflation closer to the 2% target.
• However, there are early signs that tariff pass-through is beginning to influence inflation, albeit modestly. As the chart below illustrates, the latest CPI reading pushed inflation above its pre-pandemic trend, roughly matching the previous year’s monthly increase. Much of this uptick stemmed from key goods likely affected by tariff-related cost pressures. Notably, price indexes for appliances, recreational goods, and educational commodities all accelerated compared to the previous month.

• The April CPI report offers some reassurance that the feared inflationary surge may not be as severe as initially expected. As we’ve noted in previous commentaries, these tariffs are unfolding alongside a broader disinflationary trend, particularly in shelter costs, which should help restrain an increase in the overall index for the year. That said, the full impact of inflationary pressures may not materialize until mid-to-late summer. Therefore, investors can remain cautiously optimistic regarding inflation.

More Tax Details: The latest estimate for the House Republicans’ tax bill falls within the range projected by lawmakers, clearing the way for additional adjustments to the bill.

• According to the Joint Committee on Taxation, the GOP’s latest budget proposal is projected to increase the deficit by $3.7 trillion over the next decade. This figure reflects $5.8 trillion in proposed new tax spending, partially counteracted by $1.9 trillion in savings achieved through the reversal of clean energy incentives. With this projected deficit increase remaining below the House Ways and Means Committee’s $4.5 trillion benchmark, the possibility of additional tax reductions is being explored.
• Expanding the SALT deduction has emerged as the most likely concession. Several lawmakers have signaled they would support the tax bill only if the deduction is raised from the current $30,000 cap. They contend that opposing the bill outright could lead to a full repeal of the cap, so they are pushing for a larger deduction as an incentive to vote in favor. While negotiations over a potential increase continue, House Speaker Mike Johnson has indicated that a deal could be reached by Wednesday.
• The additional fiscal flexibility could also facilitate a partial reversal of eligibility restrictions for food and health assistance programs. Republican legislators have expressed concerns that these limitations might alienate key constituents who supported Trump’s 2024 presidential victory. This newfound budgetary margin may enable lawmakers to relax certain provisions, potentially averting significant political backlash.

• Although the bill has not yet reached its final form, it is still anticipated to deliver significant stimulus to the broader economy. This economic boost could help mitigate much of the anticipated impact from rising tariffs. We expect businesses may view the bill’s provisions as an incentive to increase investment activity. Consequently, the legislation could provide meaningful support to equity markets in the second half of the year when the tariff impact becomes clearer.

Strengthening US-Gulf Relations: On the first day of his Middle East diplomatic tour, President Trump strengthened strategic partnerships with key Arab leaders, marking a significant step in countering China’s growing influence in the region.

• During his diplomatic visit, the president focused on strengthening economic and security partnerships across the Middle East. The trip yielded significant results, including Saudi Arabia’s commitment to invest more than $1 trillion in the US. A landmark agreement was also reached to enable Nvidia and Advanced Micro Devices (AMD) to supply critical semiconductor chips for several countries in the Middle East, bolstering the region’s artificial intelligence capabilities.
• Additionally, President Trump aims to address long-standing regional conflicts through diplomatic engagement. His administration has announced plans to lift sanctions against Syria’s government and remains open to negotiations with Iran regarding its nuclear program. Furthermore, he is scheduled to meet with Qatari leaders on Wednesday to discuss strengthening bilateral security cooperation.
• The president’s actions appear to be part of a broader strategy to counter China’s expanding influence in the region. Over the past five years, China has significantly deepened its trade and investment ties across the Middle East as part of its effort to reduce economic reliance on the US. This expansion has included major advancements in digital technology, with Arab nations playing an increasingly important role in Beijing’s Digital Silk Road Initiative.
• The administration’s sanctions relief and technology agreements appear strategically designed to counter China’s regional influence by disrupting its economic momentum and isolating it technologically. The Trump administration is reportedly preparing to implement new trade rules that would require partner nations to limit technology transfers to China. If effectively executed, this strategy could substantially weaken Beijing’s ability to compete with American dominance in AI.

A New Plaza Accord: Speculation is growing that the Trump administration may pressure Asian nations to allow their currencies to appreciate to bring down the value of the US dollar.

• The Trump administration has reportedly engaged in preliminary discussions with South Korea regarding currency policy. These talks coincide with upcoming bilateral trade negotiations aimed at averting potential tariffs on Korean exports. While no formal agreements have been confirmed, market reaction to the reports has already triggered appreciation in the Korean won.
• A potential appreciation of Asian currencies could reinforce market expectations that the administration favors a weaker dollar policy to prevent tariff circumvention. While this approach would increase costs for foreign imports, it might also create conditions for either reduced tariff rates or at least an avoidance of additional increases beyond those implemented on April 2.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an added US concession in the tariff war between Washington and Beijing, which will likely help de-escalate tensions between the two sides. We next review several other international and US developments that could affect the financial markets today, including an incendiary accusation by Poland that Russia was responsible for an arson fire last year that destroyed Warsaw’s biggest shopping mall (pun intended) and new signs that US lawmakers will gut many green-tech tax incentives, including for buying electric vehicles.

United States-China: After yesterday’s market euphoria over the news that the US and China had agreed to temporarily slash most of their tariffs on each other, the Trump administration last night clarified that it would also cut the US “de minimis” tariff on low-value parcels from China. Applied to packages with a retail value below $800, the de minimis tariff will now be cut to 54% from 120%. An optional $100 payment will be unchanged, rather than rising to $200. The move marks a further de-escalation in the US-China tariff war.

• The clarification will benefit Chinese retailers offering cheap goods directly to US consumers, such as Shein and Temu.
• Importantly, some low-end US retailers could also benefit, as they often rely on small shipments from China that qualify as de minimis parcels.

Russia-United States-Ukraine: President Trump yesterday told reporters that he might attend the planned Russia-Ukraine peace talks scheduled for Thursday in Turkey. The idea was quickly endorsed by Ukrainian President Zelensky, but we have seen no official response from Russian President Putin so far. Indeed, it’s still unclear whether Putin plans to attend. In any case, if Trump is serious about attending, it could set the stage for a potentially volatile, unpredictable meeting, which in itself could discourage Putin from participating.

Russia-Poland: Nearly a year after the largest shopping center in Warsaw burned to the ground, Polish Prime Minister Tusk said it is now confirmed that the fire was set by saboteurs working for the Russian intelligence services. The incident marks the latest instance of Russian destabilization efforts in the European Union. Those actions are likely to keep EU countries focused on rebuilding their militaries, which in turn will likely keep boosting EU defense firms and their stock prices.

Germany: Showing the extent to which populist nationalism and far-right authoritarianism have progressed in some Western democracies, the German government today banned the separatist organization “Kingdom of Germany” and confiscated its assets. Kingdom of Germany members have their own nominal king, reject Germany’s democratic institutions, and claim to rule a small enclave of about 2.4 acres near Wittenberg.

• Berlin’s move against Kingdom of Germany comes just days after it also declared the populist Alternative for Germany party to be a “rightwing extremist” organization, despite the party’s success in winning about one-fifth of the votes in the February federal elections. The designation gives the government the right to monitor the AfD more closely, including by tapping its communications.
• The designation has also sparked public debate over whether to ban the AfD outright. In a survey published over the weekend, some 53% of respondents favored such a ban.

United Kingdom: As firms dealt with an increase in national insurance contributions last month, April payroll employment fell by a seasonally adjusted 33,000, after a drop of 47,000 in March. The report also showed that average hourly earnings in the three months ended in March rose just 5.6% from the same period one year earlier, matching expectations but slowing from the annual rise of 5.9% in the three months ended in February. Weaker hiring but still-high wage growth is expected to keep the Bank of England cautious about cutting interest rates.

US Price Inflation: Late last week, economists at the Federal Reserve published a paper describing a new method to estimate the real-time impact of import tariffs on consumer price inflation. Looking at individual categories of personal consumption expenditures, the tariffs implemented for each category, the prevalence of imports in each category, and assumptions about pass-through from tariffs to consumer prices, the analysis estimates that President Trump’s tariffs this year have already boosted core consumer prices by 0.1%.

US Drug Industry: After hinting on Sunday that he would sign an order aggressively cutting US drug prices to “most favored nation” levels, the measure that President Trump signed yesterday only directed the Department of Health and Human Services to assist any drug company that wants to establish a direct-to-consumer purchasing program. The order threatened aggressive action against the drug firms if they don’t voluntarily cut their prices, but that was less stringent than feared. As a result, pharmaceutical stocks yesterday generally rose.

US Green Technology Industry: As we continue to process the draft budget bill presented by Republicans in the House, we note that one set of provisions would end a range of subsidies for green technology. For example, the proposal would end the $7,500 tax credit for buyers of new electric vehicles by the end of 2027 — despite the recent strong support for President Trump by Tesla chief executive Elon Musk. However, it’s important to remember that the bill at this point remains just a proposal, so it’s far too soon to know whether the provisions will become law.

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