Trade Talks Spark Optimism, But Can Palantir and the Fed Keep the Rally Going?

The U.S.-China trade talks in Geneva between May 9-12, 2025, injected a rare dose of optimism into global markets, with Dow Jones futures climbing over 200 points in early trading. However, the rally faced a counterpoint as Palantir (PLTR) shares slumped 12% on May 6 following its Q1 earnings miss—a stark reminder of the fragility of this nascent thaw in trade relations. Meanwhile, eyes turn to Fed Chair Jerome Powell’s upcoming remarks, which could either solidify or shatter the market’s cautious hope for stability.

The Trade Talks: A Fragile Starting Point

The Geneva discussions marked the first high-level in-person talks between the U.S. and China since the Trump administration’s 145% tariffs on Chinese imports. While both sides emphasized “de-escalation,” the path forward remains fraught with political and economic hurdles.

The immediate market reaction was positive, with Asian and U.S. equities rising modestly. But analysts caution that the talks are a “first step” at best. Key sticking points include:
- Tariff Reductions: China insists the U.S. must lower tariffs first, while the Trump administration refuses to budge.
- Supply Chain Collapse: U.S. imports from China are projected to drop by 80% by late 2025, per JPMorgan.
- Global Stakes: The WTO warns Chinese exports to the U.S. could plummet 77% if tariffs persist, risking a synchronized global slowdown.

The U.S. has already exempted smartphones to avoid 40% price hikes on iPhones, while China exempted pharmaceuticals and microchips. But the “de minimis” loophole closure—costing China $66 billion annually—underscores the scale of mutual harm.

Palantir: AI Gains vs. Quarterly Growing Pains

Palantir’s stock dive on May 6 highlighted the tension between long-term promise and short-term volatility. The company reported adjusted EPS of $0.13, exactly matching estimates—a rare miss for Wall Street’s darling. Yet, its AI-driven business model remains a key growth lever:

• AI Boom: Palantir’s AI Platform (AIP) saw record demand in 2024, with 32 deals over $10 million. CEO Alex Karp calls AIP adoption “unlike anything we’ve seen in the past 20 years.”
• Profitability: 2024 brought $1.25B in free cash flow and its first annual profit.
• Analyst Bullishness: Stephen Guilfoyle, who bought PLTR at $16 in 2023, raised his price target to $153 after the tariff pause—a record high—despite the Q1 dip.

The selloff, however, reflects investors’ hunger for upside surprises. Palantir’s challenge is to prove that AI adoption can offset macroeconomic headwinds, including tariff-driven supply chain disruptions.

The Fed’s Dilemma: Data-Dependent, but Data-Confused

As markets await Powell’s May 7 Fed statement, the central bank faces a quandary: inflation is cooling (PCE at 2.3% in March), but core inflation remains stubborn (2.6%). Meanwhile, GDP contracted in Q1 due to tariff-fueled trade deficits, while jobs growth held firm at 177,000 in April.

The Fed’s decision to hold rates at 4.25%–4.50% aligns with Powell’s “wait-and-see” approach. But traders now price in just three rate cuts by year-end—down from four—a sign markets are losing hope for swift easing. Powell’s challenge is clear:
- Tariff Risks: Supply chain disruptions could reignite inflation.
- Policy Ambiguity: The Fed’s hands are tied until trade talks clarify the path forward.

Conclusion: A Delicate Balancing Act

The market’s current optimism hinges on two fragile assumptions: that U.S.-China trade talks will evolve into meaningful deals and that Palantir’s AI growth can offset near-term macro headwinds.

• Trade Talks: While the talks averted a deeper rout, they’re unlikely to yield a “grand bargain” soon. China’s vow to “fight to the end” and U.S. political posturing suggest years of friction. Investors should prepare for volatility tied to incremental progress—or setbacks.
• Palantir: Its AI moat remains intact, but execution matters. AIP’s $1 billion+ in annual contracts (as of 2024) and Guilfoyle’s $153 target suggest long-term value. Yet, the Q1 miss shows that even AI darlings aren’t immune to macro headwinds.
• The Fed: With inflation and jobs data at odds, the central bank is stuck in neutral. Until tariffs ease or trade deals materialize, rate cuts are a distant hope.

In short, the market’s rally is a “buy the rumor” moment. The “sell the news” phase will come if talks stall, Palantir’s growth falters, or the Fed signals tightening. For now, investors should treat the uptick as a pause in the storm—not a return to calmer seas.