Markets are putting their trust back in Trump, as long as trade deals keep going

The tentative U.S.-China trade deal brought a fresh wave of optimism to Wall Street that President Donald Trump won’t let this year’s damage to the stock market get out of control.

An idea of a “Trump put” regained steam following more than a month of hard-to-digest volatility brought on by the president’s trade war. For Trump, it has been an uncharacteristic disengagement from Wall Street happenings considering how much emphasis he put on financial markets during his first term.

Investors for now at least can take some comfort that the White House is on their side, even if the mood during the strong rally held a dose of trepidation.

“There is optimism floating out there amongst the icebergs of uncertainty that the president won’t let this get out of hand and throw us into a recession,” said Sam Stovall, chief investment strategist at CFRA. “We have to realize that the uncertainty has not been totally cleared away. We can breathe a sigh of relief, because we have now another 90-day pause period.”

Following the weekend announcement that the dueling parties had suspended reciprocal tariffs pending a 90-day negotiating period, major averages rallied, posting better than 2% gains across the board. The Russell 2000 small-cap index, which had taken the brunt of the tariff beating, surged more than 3%.

The move followed a familiar pattern during Trump’s trade war. Markets have been intensely sensitive to headline risk that seems to come on a daily basis.

Even with the big Monday rally, there was still a strong hint of caution on the Street.

“We have to realize that the uncertainty has not been totally cleared away,” Stovall said. “We all know that both countries don’t want a trade war, but they don’t want to lose face at the same time.”

The face-saving nature of the ongoing negotiations, with neither side wanting to cave, underscores the fragile state of the Trump trade initiative and the perils that could await should the mercurial president again change his mind about what he’s seeking.

Treasury Secretary Scott Bessent told CNBC in a Monday morning interview that he expects negotiations to resume in the next few weeks. He also noted the U.S. position that it seeks a “strategic” decoupling from China and remains serious in its resolve on the fentanyl portion of the tariffs.

However, having a market veteran like Bessent at the helm of negotiations is assuaging concerns that talks could go off the rails, said Dario Perkins, managing director of global macro strategy at TS Lombard.

“Talk of ‘trade deals’ has helped undo the damage from [the April 2] Liberation Day – equities have bounced even with tariffs much higher than at the start of the year, and with massive uncertainty about what the next six months will bring,” Perkins said in a client note. “It helps that Scott Bessent has become the main spokesman for Trump 2.0. He has a real talent for sanewashing policies to make them look intellectually coherent and ‘market friendly.'”

Still, Perkins sees reason to step cautiously. He expects essentially a “muddle-through” scenario from here.

“I’m not saying the bull case is totally out of reach,” he said. “Trump clearly wants quick ‘deals,’ even phony ones. Both the UK and China deals are more spin than substance. But a muddle-through scenario does seem likely.”

Indeed, markets face other obstacles beyond the trade gyrations. Barclays strategists say they are “neutral risk assets” given those headwinds. “Attention should now shift away from policy to hard data, with inflation in primary focus,” Barclays said in a note.

Among other headwinds are weaker expected economic growth, lower corporate profits and a likelihood that the Federal Reserve could be slower to lower interest rates if tariffs don’t pose an imminent recession threat.

Already Monday, traders pushed the next Fed rate cut further out, now to September, with only two reductions expected by the end of 2025. That’s down from three cuts predicted.

Even with trade deals, there will only be so much Trump can do to help the market.

It is “(sort of) of funny that the optimistic case for Trump 2.0 is basically that it will reverse most of what it has done so far,” Perkins said.