Stocks Rally as Tariff Escalation Pauses, but Risks Remain

The stock market’s sharp rebound in early April 2025—following a historic one-day plunge—has been attributed to a critical pause in President Trump’s aggressive tariff agenda. While the administration’s “reciprocal trade” policies sparked fears of a global trade war, the 90-day suspension of most new tariffs (excluding China) on April 9 calmed investor nerves, allowing the S&P 500 to claw back losses. But beneath the surface, the complex interplay of protectionism, retaliation, and political pushback continues to reshape the investment landscape. Here’s what investors need to know.

The Tariff Timeline: From Crisis to Conditional Relief

The April 2 declaration of a national emergency under IEEPA set off a chain reaction. A 10% global tariff on non-exempt goods took effect on April 5, but the real pressure came from country-specific rates—peaking at 50% for Vietnam. China faced the harshest treatment, with tariffs jumping to 125% after Beijing retaliated with its own 84% duties.

By April 9, the administration’s abrupt pause on further hikes (except for China) provided a reprieve. This move, paired with threats of even higher tariffs if China didn’t back down, created a fragile equilibrium. Markets interpreted the pause as a sign that the administration might prioritize negotiation over all-out conflict, even as the U.S.-China tariff war reached unprecedented levels.

Why Stocks Rose: Betting on a Truce

The S&P 500’s recovery—after its worst single-day decline since March 2020—reflects investor optimism that the pause reduces the risk of a full-blown trade war. However, this rally isn’t without contradictions.

The data shows a sharp dip on April 3, followed by a partial recovery. Investors are pricing in the possibility of a negotiated resolution, but the path forward remains uncertain.

Key sectors driving the rebound include:
1. Automakers: The May 3 deadline for 25% auto parts tariffs looms, but the pause has given automakers like Ford and gm breathing room.

Both stocks rallied 8-10% post-pause, suggesting markets believe the administration might delay further auto tariffs.

1. Pharmaceuticals: Trump’s threat to impose 25% tariffs on imported drugs has yet to materialize, easing pressure on companies reliant on foreign supply chains.

The Underlying Risks: Retaliation and Political Pushback

While the pause eased immediate fears, the broader environment remains volatile. Canada’s 25% tariffs on non-USMCA compliant vehicles and its threat to expand retaliation to $155 billion in U.S. exports highlight how trade partners are pushing back. The Senate’s April 2 rejection of Trump’s emergency declaration—51-48—also signals bipartisan skepticism about unilateral trade actions.

Economically, the administration’s claims of a $728 billion GDP boost from tariffs are disputed. The Tax Foundation warns that higher consumer prices and supply chain disruptions could offset these gains. For instance, auto prices—already up 5% since early 2025—could climb further if auto parts tariffs take effect.

Sector-Specific Implications

• Energy and Materials: China’s suspension of U.S. lumber imports and tariffs on LNG (15%) have hurt exports, but U.S. coal companies face mixed results as global prices rise.
• Technology: While not directly targeted yet, global supply chains could face strain if retaliatory measures expand.

Conclusion: A Fragile Truce with Long-Term Costs

The market’s April rebound reflects a bet that the administration’s tariffs will eventually lead to better trade terms, not a full-blown crisis. However, the data paints a cautionary picture:
- The U.S.-China tariff rates (125% vs. 84%) are the highest in modern history, with no clear path to rollback.
- The 90-day pause expires July 8, 2025, and negotiations over currency manipulation (China), VAT disparities (EU), and non-tariff barriers (India/South Africa) are far from settled.
- The Senate’s push to curb presidential tariff authority—via bipartisan bills requiring congressional approval—could further destabilize trade policies.

Investors are right to see the pause as a temporary reprieve, but the long-term costs of this protectionism are mounting. With inflation risks rising and geopolitical tensions unresolved, portfolios should balance exposure to tariff-affected sectors (autos, energy) with defensive plays in tech and healthcare. The “lack of escalation” is a relief—but not a solution.

Data sources: U.S. Trade Representative reports, Federal Reserve economic indicators, and stock market indices.