3 ways Trump’s tariffs are changing global trade

The apparent stalemate in the U.S.-China trade war continues. Over the past week, we haven’t seen much movement, despite news stories on Friday reporting that China was “evaluating” the latest overtures from the Trump administration.¹ We continue to believe that it will be some time before either side truly budges. The calculus is simple: both countries recognize the potential political and economic ramifications of giving away too much, so neither side is willing to make the first move. China did pull back some tariffs last week, but in our view, they aren’t key to the overall negotiation. Before any deal is reached, both sides will have to determine what tariffs at various potential levels could mean to their countries in the longer term, and given the number of scenarios, that could take a while. In the interim, the hope is that other countries may be able to resolve their tariff situations with the United States, which would at least return some measure of stability to the global trade landscape. It is important to note that we have already seen some shifts in global trade patterns as a result of Trump’s tariffs. For one, some countries are trying to reroute trade away from the U.S. Secondly, some companies have stopped their shipments from China due to the added expense from the tariffs, resulting in the photos of empty U.S. ports that have circulated on social media. It remains to be seen how much pain this will cause for U.S. companies and consumers. And finally, it is likely that countries are discussing how they can become less reliant on the U.S. In many cases, it will be impossible for countries to cease trade with the U.S. completely, nor is that necessarily their goal. But by building trade agreements with other nations, it is possible that some countries will be able to meaningfully reduce their trading volume with the U.S., which would obviously have negative consequences for some U.S. companies. This game is far from over.

Q1 earnings announcements are beginning to roll out, with Technology giants Meta and Microsoft the first of the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) to report. Overall, both companies delivered great results. It was particularly encouraging that they both highlighted additional capital expenditures, which some analysts had worried could be in jeopardy given President Trump’s tariffs and the uncertain economic outlook. Not surprisingly, markets reacted positively to this news. Looking at the broader Tech sector, including semiconductor manufacturers, we continue to believe that fundamentals are important and earnings matter. That has provided some support to the market from the current macro situation and could also provide some protection against a downside surprise. For instance, right after Microsoft and Meta’s earnings, Apple and Amazon reported their results, which were less positive. Amazon was barely down while Apple was down just under 4%. Despite these results, markets forged higher with the S&P 500 up almost 1.5%. Typically, if these two bellwethers had poor results it would have taken markets down. It’s clear that the White House could flip the script at any time if they roll out another unexpected policy, and there are still many questions about what will happen when the 90-day pause on Trump’s “Liberation Day” tariffs is over. But for now, it’s nice to see some positive (or less negative) news driving markets, even if it is only one chapter of a broader economic story. Looking ahead, we’ll be watching the earnings reports for the other Mag 7 companies.

Outside of the Tech sector, company outlooks have been much murkier. Forward guidance has been a mixed bag, with some firms committing to a single scenario, some being non-committal by publishing expectations for multiple scenarios, and some opting not to provide guidance at all. This is what happens when the economic and trade landscape is so uncertain—it’s very challenging for companies to plan ahead given the scarcity of information currently available, especially in industries and sectors that are heavily impacted by Trump’s tariffs. In the consumer sectors, we’d categorize earnings results as mixed: some have been okay, while others have noted changes in consumer spending patters that are negatively affecting their bottom line. In our view, that’s an important story to monitor, as it could confirm the extent to which spending is slowing down and the consumer is weakening, and tell us whether the damage might be limited to particular sectors of companies. Additionally, U.S. gross domestic product (GDP) data announced last week was a bit softer, while many analysts are expecting inflation to rebound in the coming months. This would be a bad combination for companies, as the cost of capital could rise as economic activity slows down, meaning that the U.S. Federal Reserve (Fed) would be unlikely to provide relief in the form of interest rate cuts.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Trump’s trade war goes global.