The US-China Trade Truce and the Global Equity Market Rally: A Catalyst for Risk-On Sentiment

The global equity market's Q3 2025 rally has been a striking phenomenon, with investors embracing risk-on sentiment amid a fragile but tangible easing of US-China tensions. After years of geopolitical friction and economic decoupling, the June 2025 London talks between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng marked a pivotal shift. The agreement to temporarily ease export controls on rare-earth minerals and AI chips-while leaving deeper structural issues unresolved-has injected optimism into markets, reducing trade-related uncertainty and spurring capital flows into high-growth sectors.

Diplomatic Easing: A Temporary Truce with Lasting Market Implications

The US-China trade relationship has long been a wildcard for global markets. Tariffs that once exceeded 145% on US goods and 125% on Chinese imports were reduced to 30% and 10%, respectively, following the 2023 Geneva negotiations, according to Schroders' Q3 2025 market review. The June 2025 talks built on this framework, with both sides agreeing to pause technology export curbs and ease access to rare-earth materials. For US automakers like Ford and GM, this means reduced supply chain bottlenecks, while Chinese manufacturers gain breathing room to meet global demand for EV components.

According to Forbes, the London agreement also included a commitment to increase student visa allocations, signaling a thaw in people-to-people exchanges. While these measures are far from a comprehensive resolution, they have created a "diplomatic buffer" that has allowed markets to recalibrate. As stated by the CSIS analysis, the Biden-Xi summit in 2024 laid the groundwork for military-to-military dialogue and cooperation on narcotics trafficking, further reducing the risk of conflict.

Risk-On Sentiment: Markets Bet on Stability and AI-Driven Growth

The immediate market response to these developments has been robust. Q3 2025 saw global equities climb on the back of reduced trade uncertainty, a Fed rate cut, and surging demand for AI infrastructure. The MSCI Emerging Markets Index delivered double-digit returns, with China, Taiwan, and South Korea leading the charge, according to Forbes. This performance was not accidental: the US-China trade truce has allowed investors to reallocate capital toward long-term opportunities, particularly in AI and chip self-reliance initiatives.

Schroders' Q3 2025 market review highlights that the Technology Sector rose over 22%, driven by megacap stocks in information technology and communication services. The Federal Reserve's rate cut in July 2025 further amplified this momentum, with investors betting on sustained economic growth and corporate earnings resilience. Meanwhile, UNCTAD data reveals that global trade expanded by $500 billion in the first half of 2025, defying expectations of a slowdown amid geopolitical tensions.

Investor Sentiment and the Road Ahead

Despite the optimism, challenges persist. The US trade deficit with China remains a significant hurdle, with imports from China outpacing exports by $101.96 billion in the first five months of 2025, per UNCTAD. Additionally, the 2025 Kearney FDI Confidence Index notes that while executives are optimistic about long-term opportunities, near-term risks-such as elevated stock valuations and geopolitical volatility-remain top concerns.

The current truce is also temporary. Tariff reductions are set to expire in mid-November 2025, and both nations continue to prioritize economic self-reliance. As the World Bank's updated China growth forecast of 4.8% suggests, however, the diplomatic pause has provided enough stability for investors to focus on structural trends rather than short-term noise.

Conclusion: A Delicate Balance for Investors

The US-China trade truce has acted as a catalyst for risk-on sentiment, but it is not a panacea. Investors must balance the short-term benefits of reduced trade tensions with the long-term reality of strategic competition. For now, the market's embrace of AI-driven growth and emerging markets-particularly in Asia-reflects a belief that the current diplomatic framework can hold. Yet, as history shows, the relationship between the world's two largest economies is as much about cycles of escalation as it is about cooperation.

For investors, the key takeaway is clear: while the current environment favors risk-on allocations, diversification and scenario planning remain critical. The global equity market's Q3 2025 rally is a testament to the power of diplomacy-but also a reminder of its fragility.