Market Minute: The U.S.-China Trade Deal and AI Revival are Bullish for Markets

The financial markets have been on a rollercoaster in recent months, with fears of an imminent recession giving way to a renewed rally in equities. The key driver behind this shift has been the temporary truce in the U.S.-China trade war, which has delayed what many analysts believed was an unavoidable economic downturn. Earlier this week, the U.S. and China announced a breakthrough trade agreement that temporarily lowered tariffs on each other's products for 90 days. The U.S. dropped its 145% on Chinese goods to 30%, while China lowered levies from 125% to 10%. 

The deal has also alleviated fears of an imminent inflationary swell. Had tariffs remained at peak levels, businesses would have faced significantly higher input costs, leading to price hikes across the economy. Instead, the temporary reprieve has given companies time to adjust, reducing the likelihood of a near-term inflation shock. The tariff delay has not only postponed a potential recession but also reduced the odds of a stagflationary scenario. Economic data, which had been flashing warning signs since February, may now begin to stabilize or even improve as trade tensions ease. While recession risks remain, the timeline has now been pushed back, possibly to late 2025 or early 2026.

At the same time, inflation remains subdued, and the resurgence of the artificial intelligence (AI) theme, fueled by new international deals, provides a fresh tailwind for tech stocks. The S&P 500 has staged a remarkable recovery since its near-bear market lows in April. Investors who positioned themselves defensively by shorting the market in anticipation of further declines were caught off guard by the rapid rebound. The index has not only reclaimed its 200-day moving average but has continued to climb, defying earlier expectations of a prolonged downturn.

For now, investors are operating under a ceasefire mentality. With volatility falling below 15, the S&P 500 could continue to grind higher in a low-volatility environment. The absence of immediate recessionary signals and contained inflation creates a favorable backdrop for equities in the near term. However, this renewed optimism may be short-lived. The S&P 500’s 22% surge since April has perhaps left the market in overbought territory, increasing the likelihood of near-term correction. Trade tensions could flare up again, fiscal policy risks remain, and the Fed’s ability to navigate an uncertain economic landscape is far from guaranteed. For now, the market is enjoying a period of relative calm, but investors should remain vigilant as the next downturn may only be a few bad headlines away.