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US equities experienced a significant rally today, with major indices reaching multi-week highs. This bullish sentiment stems from a combination of factors, primarily the temporary easing of trade tensions and a decline in Treasury yields.
Easing Tariff Concerns:
The market experienced a wave of relief following the President’s decision not to immediately impose new tariffs on China and Europe. While the threat of broader trade restrictions remains, the avoidance of immediate action on these major trading partners has provided a short-term boost to investor confidence. However, the President’s order to address “unfair trade practices” globally and the impending imposition of tariffs on Canadian and Mexican goods underscore the ongoing uncertainty surrounding trade policy.
Yields Slump as Inflation Expectations Moderate:
A sharp decline in Treasury yields has also contributed to the stock market’s ascent. Falling inflation expectations, driven in part by the President’s pledge to increase domestic oil production, have boosted demand for bonds. This has pushed bond prices higher and yields lower, creating a more favorable environment for risk assets.
Other Market Drivers:
• Earnings Season: The strong start to the earnings season, with several companies exceeding expectations, has further fueled the market rally.
• Economic Data: While mixed, recent economic data points, such as the rise in Eurozone new car registrations, have provided some support for global growth prospects.
Notable Market Movers:
Upside: Moderna led gains after receiving additional government funding for its bird flu vaccine. 3M Co. also saw significant gains following strong quarterly earnings.
Downside: Apple shares experienced a significant decline following weaker-than-expected iPhone sales in China. Walgreens Boots Alliance suffered heavy losses after facing legal action from the Justice Department.
What’s Next for US Stocks?
The market remains sensitive to developments on the trade front. While the immediate threat of tariffs on China and Europe has receded, the ongoing trade disputes with other nations and the potential for further escalation pose significant risks. The Federal Reserve’s monetary policy decisions will also continue to influence market sentiment.
The Dow Jones Industrial Average rose by 1% on Tuesday, with the S&P 500 and Nasdaq Composite also rising. 3M’s earnings came in better than analysts expected, and small-cap stocks like the Russell 2000 also participated in the rally. Amazon and Alphabet each gained more than 2%, while Apple’s drop of over 4% was weighed on the tech-heavy Nasdaq.
Trump said he was considering 25% tariffs on Mexico and Canada due to their border policies and mentioned China, noting that the U.S. could impose tariffs on the country if it doesn’t approve a TikTok deal. He issued a broad memorandum directing federal agencies to study unfair trade policies with foreign countries, but stopped short of authorizing new levies on his first day back in the Oval Office. Trump’s policy announcements on tariffs were more benign than expected, and that it is a lower priority than previously expected, according to some observers and experts.
Outside of trade policy, Wall Street is focused on Trump following through on pro-business proclamations made throughout his campaign, such as his calls for looser regulations that helped lift banking banking stocks following his election win in November. Other components of the so-called Trump trade, including small caps, oil stocks, and bitcoin, will likely be hypersensitive to what his administration does. In his inaugural address, the president labeled his return to the White House as the beginning of a period of growth and success for the country, while largely condemning the Biden Administration.
