Trade Deals Trim Gains: Navigating the Market's Delicate Dance with Trump's Tariffs

The U.S. stock market opened cautiously optimistic on May 11, 2025, as President Donald Trump announced a limited trade deal with the U.K. and hinted at potential tariff reductions with China. Yet by day’s end, the Dow Jones Industrial Average, S&P 500, and Nasdaq had pared earlier gains, reflecting lingering skepticism about the administration’s trade strategy. The indices closed up modestly—Dow +0.6%, S&P +0.6%, Nasdaq +1.1%—but failed to sustain intraday highs that briefly flirted with 2% gains. Here’s why investors are cautious, and what lies ahead.

The Trade Deal Framework: More Symbolism Than Substance?

The U.S.-U.K. agreement, framed as a “historic breakthrough,” retains a 10% baseline tariff on most goods—a rate that will remain in place indefinitely. Carve-outs include slashing tariffs on British autos (from 27.5% to 10%) and eliminating duties on steel and aluminum. However, this narrow focus has drawn criticism from economists. “This isn’t a trade deal—it’s a receipt for a marble block,” says RSM’s Joe Brusuelas, noting the absence of binding terms on services, digital taxation, or healthcare access. The deal’s economic impact is further constrained by the U.K.’s small trade footprint (3% of U.S. trade volume).

Tariff Talk with China: Hope vs. Reality

Trump’s suggestion of lowering U.S. tariffs on China from 145% to 80% sparked early optimism. Yet analysts emphasize this is still a punitive rate—more than double the global average—and insufficient to reignite trade. “An 80% tariff is a tax on American consumers, not a negotiation lever,” warns JPMorgan’s Abiel Reinhart. Meanwhile, China has yet to reciprocate, compiling a list of U.S. goods exempt from its 125% tariffs but avoiding public concessions. The administration’s claim of “many trade deals close to done” also faces scrutiny: only one (U.K.) has been announced, with over 100 more needed by July 8 to avert 50% retaliatory tariffs.

Market Sectors: Winners and Losers in the Tariff Shuffle

• Automotive: British brands like Rolls-Royce and Bentley benefit from the 10% auto tariff, but mainstream manufacturers like Toyota (TM) face headwinds. The 100,000-vehicle cap on tariff-free U.K. cars limits gains for most.
• Steel & Aluminum: U.S. producers like Nucor (NUE) gain from relaxed U.K. tariffs, but global trade wars keep prices volatile.
• Technology: Fears of China sanctions linger. NVIDIA (NVDA) and AMD (AMD) fell 2% pre-announcement, rebounding only after Trump’s China comments.

The Elephant in the Room: Economic Costs of Tariffs

The Federal Reserve’s warning that tariffs could push inflation to 4% by year-end looms large. GDP contracted 0.4% in Q1 2025 as businesses depleted pre-tariff stockpiles, and JPMorgan forecasts a further 80% drop in Chinese imports by mid-2025. “The tariff shock hasn’t hit yet,” says Fed Chair Jerome Powell, but sectors like retail and manufacturing are already bracing for shortages.

Investor Takeaways: Proceed with Caution

1. Short-Term Rally, Long-Term Uncertainty: Markets may rally on each new “deal” announcement, but sustained gains require concrete terms. The U.K. framework’s vagueness underscores the administration’s reliance on verbal commitments over binding agreements.
2. Sector Rotation: Rotate into sectors insulated from tariffs, like domestic energy (EQT, Expand Energy) or healthcare (GE Healthcare), while avoiding consumer discretionary stocks exposed to global supply chains.
3. China Tariffs Are the Litmus Test: A meaningful reduction in U.S.-China tariffs (below 50%) would boost tech and industrials; failure risks a broader market selloff.

Conclusion: A Fragile Balance

The May 11 trade deal announcement provided a fleeting boost to U.S. equities, but the market’s retreat by day’s end signals investor wariness. With the administration’s 200-trade-deal pledge facing feasibility hurdles and China negotiations stalled, the path to sustained growth remains clouded. Until tariffs fall meaningfully—and not just on niche sectors—the “trade deal rally” is likely to remain a short-lived phenomenon. Investors are advised to prioritize defensive sectors and remain vigilant for further volatility.