The Re-rating of Global Equities: Trade Deals, Earnings Momentum, and the Fed’s Dilemma

The global equity markets have entered a period of re-rating, driven by a delicate interplay of trade optimism, earnings momentum, and central bank policy. As President Donald Trump’s aggressive tariff regime reshaped trade dynamics, investors have recalibrated their strategies to balance the risks of inflation and political uncertainty with the rewards of sector-specific growth. This article examines how strategic positioning in equities—particularly in technology and export-oriented industries—can capitalize on the current environment, while navigating the Federal Reserve’s tightening dilemma.

Trade Deals as a Stabilizing Force

The U.S. trade landscape in 2025 has been defined by both conflict and cooperation. While Trump’s 18.3% average effective tariff rate—the highest since 1934—sparked global uncertainty, new trade agreements have emerged as a counterweight. The U.S.-China “total reset” reduced tariffs on Chinese goods from 145% to 30%, while reciprocal deals with the EU and Japan established baseline rates of 15% for most goods [1]. These agreements injected stability into markets, with Japanese stocks and the yen benefiting from reduced export tariffs. Similarly, the U.S.-UK-India free-trade pact and China-ASEAN cooperation signaled a shift toward diversification away from U.S.-centric trade [2].

The immediate impact was evident: the S&P 500 and Nasdaq hit record highs in July 2025 following the U.S.-China tariff rollback [1]. However, this optimism was tempered by concerns over U.S. debt, as Moody’s downgraded the nation’s credit rating [1]. The key takeaway for investors is that trade deals, while mitigating short-term volatility, remain contingent on geopolitical shifts and retaliatory measures from countries like Brazil and Canada [3].

Earnings Momentum: The Tech Sector’s Resilience

Corporate earnings have emerged as a critical driver of equity valuations. Despite the drag from tariffs—General Motors and Toyota alone face $10 billion in annual losses—66% of S&P 500 firms exceeded earnings expectations in Q3 2025 [4]. The technology sector, in particular, has defied headwinds. Nvidia and Microsoft, beneficiaries of AI infrastructure demand, saw their valuations surge, with the Magnificent Seven collectively recovering $2 trillion in market value after Trump paused pending tariffs in April [5].

This resilience is not accidental. J.P. Morgan Global Research notes that tariffs have not significantly slowed global growth, partly due to gradual implementation and frontloaded imports [2]. Investors are increasingly adopting the “TACO trade”—betting that Trump’s rhetoric will soften before implementation—further fueling optimism [5]. However, sectors like textiles and automotive remain vulnerable, with consumers facing short-run price hikes of 37-39% [6].

The Fed’s Dilemma: Inflation vs. Growth

The Federal Reserve faces a precarious balancing act. While tariffs have pushed U.S. consumer prices up by 1.8% in 2025, the labor market’s strength and corporate earnings growth have allowed the Fed to delay aggressive rate hikes [6]. The central bank’s challenge lies in managing inflation without stifling the momentum from trade deals and AI-driven productivity gains.

The WTO’s revised 2026 trade growth forecast of 1.8% underscores the uncertainty [1]. If the Fed tightens too quickly, it risks derailing the fragile recovery in manufacturing and export sectors. Conversely, inaction could exacerbate inflationary pressures from tariffs. Investors must monitor the Fed’s response to this dilemma, as policy shifts could disproportionately impact sectors like energy and financials [5].

Strategic Positioning: Navigating the New Normal

For investors, the path forward lies in sectoral diversification and hedging against trade-related volatility. Technology and AI infrastructure remain core holdings, given their resilience and growth potential. Export-oriented industries, such as Japanese manufacturing and U.S. agricultural producers, also present opportunities amid trade deal-driven demand.

Conversely, sectors exposed to retaliatory tariffs—such as automotive and textiles—require caution. Defensive positions in utilities and healthcare can offset risks from inflation and geopolitical shocks. Additionally, investors should consider currency hedges, as the yen and other trade-sensitive currencies may fluctuate with tariff adjustments [2].

The re-rating of global equities hinges on the interplay of trade policy, earnings performance, and central bank actions. While the road ahead is fraught with uncertainty, the current environment offers a unique opportunity to capitalize on structural shifts in global trade and technology.

Source:
[1] Trump tariffs inject more uncertainty into global economy [https://www.cnbc.com/2025/08/01/trumps-tariffs-rekindle-global-trade-tensions.html]
[2] US Tariffs: What's the Impact? | J.P. Morgan Global Research [https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs]
[3] Discover this week's must-read trade stories [https://www.weforum.org/stories/2025/08/trade-tariff-threats-become-reality-trade-stories-august-2025/]
[4] Monthly Market Commentary – August 2025 [https://www.parkavenuesecurities.com/monthly-market-commentary-august-2025]
[5] Has the Stock Market Reached Peak Optimism on Tariffs? [https://www.morningstar.com/markets/has-stock-market-reached-peak-optimism-tariffs]
[6] State of U.S. Tariffs: August 7, 2025 - Yale Budget Lab [https://budgetlab.yale.edu/research/state-us-tariffs-august-7-2025]