It appears US equities are getting caught up between Sino-US geopolitical tensions. Ironically, it is the under owned stocks in export sensitive economies, like China and the EU, that have prospered on expectations of greater fiscal spending brought about by Trump’s ‘America First’ agenda.
On the US side, it seems that Trump’s trade protectionism agenda has backfired. The mighty US tech sector has seemingly lost its sheen, and the risk of a US recession has increased. The Atlanta Fed’s early read on real GDP for the first quarter of 2025 estimates a contraction of 2.4% at an annualised rate, the biggest decline since the pandemic-led lockdown.
Much of that decline comes from imports brought forward ahead of expected US tariff increases, which led to a large drag on GDP. It is not yet clear if this is just a temporary stalling in growth or something more significant. Final sales to domestic producers, a more specific measure of domestic private consumer demand that excludes exports, is still growing at a 0.8% rate, which is probably a better read of the health of the underlying economy.
Trump may be placing greater importance on keeping the cost of government borrowing down at the expense of the equity market. That’s because Trump’s party, the Republicans, will be asking Congress over the coming months to raise the debt ceiling limit by over $4trn as part of a comprehensive legislative package to deliver on his domestic priorities. Trump will want to show that the US public debt market is stable ahead of a likely “Birthday Summit” with President Xi in June when both presidents celebrate their birthdays. Trump will want the Chinese to commit to buy more US Treasuries at that meeting.
Furthermore, in an interview on Fox News on March 10, Trump appeared to talk down long-term interest rates by saying the US economy is experiencing a “period of transition”. That’s because he wants a weaker US dollar to support the competitiveness of US manufacturing. Indeed, Trump made this point in a speech to a joint session of Congress on March 4 when he said, “We need a weaker dollar to bring back our manufacturing jobs. A strong dollar makes it difficult for our companies to compete globally”.
Trump is also using the war in Ukraine, and the threat of removing financial and military support, as leverage to get European nations to step-up fiscal spending on defence and ideally, US military hardware. Following the recent German election, there is a desire from the leadership of the new incoming government to raise fiscal spending by reforming the so-called “debt brake” – a mechanism to ensure budget deficits are kept down on a structural basis. This includes more German public expenditure on infrastructure and an open-ended commitment to raise defence procurement. Essentially, this expansionary fiscal policy could narrow the US-European growth gap and give impetus for the euro to appreciate against the dollar.
On the China side, Beijing is using a subtle response to Trump’s trade tariffs. President Xi’s recent meeting with Jack Ma, the co-founder of tech giant Alibaba, was choreographed to show the Tech sector has implicit approval from the Chinese political leadership.
In addition, the release of DeepSeek (an AI model by a Chinese startup) in January did not help the US tech sector either. DeepSeek raises questions on whether US companies should be spending so much money on computing hardware.
China is using its “soft power” to weaken US dominance in financial markets and its economy down a notch to strengthen the country’s negotiation hand ahead of an inevitable President Trump-Xi summit to discuss trade and investment.
Arguably, the key takeaway for investors from recent Sino-US geopolitical tensions is that the US dollar has depreciated. This adds support for US stocks in several ways. First, they become cheaper for non-US investors. Second, fundamentally, a weaker US dollar should boost US multinationals’ profits from overseas when translated back home. And third, dollar weakness indicates that there is a greater supply of the currency than demand. Potentially, this creates favourable financial conditions for equities to recover from oversold levels should money flows back to risky assets.
The recent US equity price falls mean valuations for the so-called US ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) look more favourable. For instance, their aggregate forward price-to-earnings ratio is at a 40% premium compared to the rest of the US S&P 500, its lowest level since 2018.[1] Nvidia is trading on a valuation of 24 times earnings, which looks relatively attractive considering its high profit margins and potential for rapid growth in expected sales over the coming years from AI demand.
The US 30-year Treasury yield is currently at 4.6%, down 0.4% points from a peak in mid-January. Fundamentally, given US mortgage rates are priced-off the long-term cost of government borrowing, less money is being spent on making interest payments, potentially giving a boost to the housing market to drive economic growth. Lower Treasury yields also support stocks by making equity valuations look more attractive to government bonds.
Although it is early days, the ructions seen in equities does not appear to have dampened consumer expenditure. That’s because with inflation slowing and jobs being created, annual real take-home pay grew nearly 2% in January. Moreover, deregulation and expected tax cuts should drive hiring. The National Federation of Independent Business survey (a barometer of small business sentiment) shows that hiring intentions are at their highest level in over a year. Importantly, this should give consumers the confidence to shop.
Providing the US economy continues to grow at a relatively healthy clip, this increases the chances that companies can deliver on consensus earnings’ expectations. As it stands the consensus expects MSCI USA earnings-per-share (EPS) growth of 12.1% in 2025, a modest downgrade from 14.5% at the start of the year. However, in early January, EPS for 2026 has been revised up to 14.5% from 13.2%.[2] Overall, there has been little change in company earnings’ expectations when averaging out this year and next.
To summarise, US equities have felt the brunt of uncertain China-US geopolitical tensions. On the upside, the ‘Magnificent Seven’ stock valuations have adjusted to more reasonable levels. The US dollar appears to have peaked to create favourable financial conditions for stocks. Moreover, the economic outlook remains encouraging, supported by consumption and the labour market, but with increased downside risks from policy uncertainty.
Trump appears willing to tolerate volatile markets in the short term to achieve his longer-term goals of weakening the dollar and keeping the cost of government borrowing down to fund his domestic priorities. For that he will still need to find common ground with President Xi in the summer.
Daniel Casalii is the Chief Investment Strategist at Evelyn Partners
"Five reasons to expect a US equity recovery" was originally created and published by Private Banker International, a GlobalData owned brand.
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