A dose of reality: New highs in the indices are not easy to achieve at this stage

Markets will closely follow the trade talks between the U.S. and China this weekend, but even in the unlikely event of a significant rollback of tariffs on Chinese goods after the talks, the main obstacles to trade and global growth remain, making it difficult to envision a sustained stock rally.

China, as the largest importer to the U.S., is at the forefront of the trade war with the U.S. According to Bloomberg calculations, effective tariffs on China amount to 26%, which is significantly higher than those on other countries.

But even if tariffs on China are significantly reduced (which is unlikely, as 80% seems to be a starting position for negotiations), the main tariff rate of 10% for other countries remains.

This still means that the overall effective tariff rate in the U.S. is higher than it has been since the 1930s.

Back then, the U.S. was a net importer of goods, and consequently, the impact on global growth was much weaker than it is today.

And even if agreements are reached in all directions before the 90-day tariff pause deadline on July 9, it is unlikely that tariffs will return to pre-Trump levels, and some sectoral tariffs are likely to remain (the agreement with the UK suggests that base tariffs of 10% are likely to remain, and tariff rate quotas, rather than full exceptions, will become common).

Despite the short-term blow to growth and supply chains from the customs shock that is already too late to reverse, the current environment is not particularly favorable for stocks, despite the inevitable rally on good news.

On the other hand, it is more likely, considering that trade negotiations are often long, arduous, and confusing, that no substantial outcome will emerge from this weekend’s meeting, or there will be a stalemate, and stocks will decline.

Investors should fear a drop in stocks more than dream of new highs in the current situation, as noted by Tatiana Darie.

However, different sectors of the stock market show more asymmetry.

Semiconductors, small companies, and retail chains are significantly below their recent peaks compared to the S&P and may bounce back stronger if an impression of progress is made after the negotiations.