Focus on what matters beyond the tariff deadline

Tariffs had been a key driver of the S&P 500 Index until July, when the stock market gained ground despite uncertainty around industry‑specific tariffs and whether the U.S. and key partners would be able to hash out new trade frameworks in time (Figure 1). The factors driving this divergence are important to understand in assessing the policy and market environment.

A pivot to pragmatism on trade policy

The magnitude and breadth of the country‑specific tariffs that President Trump unveiled on April 2 roiled markets, as did the administration’s apparent willingness to accept near‑term economic weakness in exchange for longer‑term structural changes in the economy.

Although tariffs remain at the heart of the president’s trade policy, the administration’s initial dogmatism appears to have given way to a more pragmatic approach. Delays and rollbacks to extreme tariffs—as well as U.S. trade agreements with key partners (Figure 2)—have eased the market’s near‑term worries.

Critically, early trade deals provided a playbook for other countries seeking to negotiate with the Trump administration and helped to anchor the market’s expectations on where tariffs might land. Subsequent deals followed a similar pattern: a 10% to 20% tariff rate, along with purchase agreements for certain goods and/or pledges to invest in the U.S.

Talks between the U.S. and China also appear to be progressing. Both sides dropped the triple‑digit tariff rates that were bandied back and forth in the spring. And the U.S. has relaxed some of its restrictions on technology exports, while China has announced a time frame for resuming limited shipments of rare earth metals that are critical to modern industry.

Fiscal stimulus and renewed AI enthusiasm

U.S. fiscal policy should also provide an offset to the potential economic drag from an effective tariff rate that is likely to increase to between 10% and 20%, from 2.5% at the start of the year.

The tax and spending legislation that Congress passed in July is expected to be modestly stimulative over the next few years. Here, the question is the extent to which favorable tax treatment of capital expenditures will prompt businesses to invest more in plants, equipment, and research and development.

These tax benefits should provide additional fuel to the spending boom on data centers and other infrastructure related to the artificial intelligence (AI) revolution—a key trend that has been propelling the market higher. However, further upside could be in the cards if capital spending were to accelerate in other parts of the economy.

What to watch next for trade and markets

So far, higher tariffs haven’t shown signs of being a major problem for the economy. Measures of consumer and business confidence have rebounded significantly, which is encouraging for economic activity. We will be watching the incoming data closely to see whether this resilience continues or if inflation ticks up and cracks in the economy start to emerge.

On the trade front, ongoing negotiations with China remain a source of uncertainty. Discussions appear to be trending in the right direction, but a collapse in talks could be a headwind for the market. Conversely, any downward adjustment to the 30% tariff on Chinese goods would be an unexpected tailwind.

Tariffs targeting specific sectors are also on the horizon. Policies here are more likely to be driven by national security concerns in critical industries such as pharmaceuticals and semiconductors.

Bottom line: The health of the U.S. economy and progress on a potential trade agreement with China will be important to watch beyond the tariff deadline.