Trade Talk Optimism Fades as Markets Weigh Realities of US-China Deal

The U.S.-China trade talks in Geneva on May 11, 2025, sparked a brief market rally, with stocks surging on hopes of de-escalation. But as details of the tentative agreement emerged, investor enthusiasm waned. While the talks marked a diplomatic breakthrough, analysts caution that the deal’s substance remains unclear—and the risks of renewed tension loom large.

The Market’s Immediate Reaction
The announcement of “substantial progress” in Geneva sent U.S. stock futures soaring. The S&P 500 futures rose 1.25% (70.75 points) overnight, while Nasdaq futures climbed 1.44% (289.25 points). The rally reflected relief that the tariff war had avoided a further escalation. However, the euphoria was short-lived. By the next morning, markets drifted lower as traders awaited specifics.

What’s in the Deal?
The agreement’s core elements remain shrouded in ambiguity. U.S. officials highlighted two main points:
1. Tariff Adjustments: The U.S. may reduce its 145% tariffs on Chinese goods to 80%, contingent on reciprocal concessions.
2. Consultation Mechanism: Both sides agreed to establish a dialogue framework to address trade disputes.

However, critical details—such as the scope of tariff cuts, China’s commitments, and enforcement mechanisms—were left undefined. Treasury Secretary Scott Bessent noted the talks were “constructive,” but analysts pointed to the absence of structural reforms, such as resolving intellectual property disputes or subsidies for state-owned enterprises.

Why the Skepticism?
Investors see echoes of past trade deals, particularly the 2019 “Phase One” agreement, which offered temporary tariff relief but failed to address systemic imbalances. Christopher Hodge of Natixis warned, “This looks like another stopgap, not a solution.” His caution is backed by data: even an 80% tariff—down from 145%—would still cut bilateral trade by nearly half, according to Peterson Institute economist Gary Hufbauer.

Analysts also flagged the political risks. President Trump’s history of erratic tariff policies raises doubts about whether the deal will hold. Jamie Cox of Harris Financial Group noted, “If the administration perceives weakness, it could renege—and markets would punish that.”

The Data Behind the Doubts
The market’s initial euphoria may have been overdone. While the S&P 500 had rallied 13% from April lows, much of that gain reflected pricing in a “de-escalation premium.” Technical analysts highlighted resistance near 5,650—a level the index failed to breach in May. Meanwhile, the Hulbert Stock Newsletter Sentiment Index, a contrarian indicator, surged to record levels, suggesting greed had reached extremes.

Looking Ahead: Risks and Opportunities
The path forward hinges on three factors:
1. Transparency: Markets need clarity on the deal’s terms, including China’s concessions.
2. Data Releases: Upcoming U.S. economic data, such as April’s CPI and retail sales, will test whether tariffs are spurring inflation or stifling demand.
3. Fed Policy: The Federal Reserve’s “wait-and-see” stance on interest rates adds uncertainty.

For investors, the lesson is clear: optimism should be tempered. As J.P. Morgan analysts noted, the U.S.-China relationship remains “a work in progress,” with structural issues unresolved.

Conclusion
The Geneva talks averted an immediate trade war escalation, but the deal’s fragility leaves markets vulnerable. While stocks may stabilize in the short term, the absence of structural reforms and lingering geopolitical risks suggest volatility will persist. History shows that U.S.-China trade agreements often deliver temporary relief rather than lasting solutions. Investors would be wise to focus on sectors insulated from trade tensions—such as domestic tech or healthcare—while keeping a wary eye on tariffs and the Fed’s next move.

As the old Wall Street adage goes: “Don’t mistake a pause in the storm for the sun coming out.” For now, the U.S.-China deal is just that—a pause, not a solution.