Wall Street rallies on US-China trade truce as bonds sink

A surge in big techs drove the Nasdaq 100 toward a bull market.

Wall Street’s bets that the US-China trade truce marks the end to an all-out tariff war drove the S&P 500 up 3%, while sinking defensive corners of the market from bonds to gold and haven currencies. The dollar was poised for its best day since November.

The rebound in risk appetite and diminished expectations of a recession drove the stock benchmark above Donald Trump’s April 2 “Liberation Day” level. A surge in big techs drove the Nasdaq 100 toward a bull market. Amid a potential reset in inflation expectations, Treasury yields climbed as traders lowered their Federal Reserve wagers to just two rate cuts in 2025. As tensions eased, a corporate borrowing blitz got underway.

The US and China will temporarily lower tariffs on each other’s products, buying the world’s two largest economies three months to work toward a broader agreement. Trump said China had agreed to remove non-tariff barriers to US imports as he announced a deescalation of his trade war with Beijing, suggesting even greater concessions could be in store if talks progress

“No one had these low China tariff rates on their bingo cards. This is a big positive surprise,” said Jeff Buchbinder at LPL Financial. “Risk remains that tariffs go back up from current levels as the pauses end, though taking worst-case scenarios off the table is reassuring.”

Meantime, the House tax committee released key details of the multi-trillion dollar tax-cut bill Trump is seeking to enact as his signature legislative achievement this year. It renews many of his first-term tax cuts, set to expire at the end of the year. But narrow Republican margins in the House mean that the president needs near-unanimous support from his party pass the bill.

The S&P 500 breached its key 200-day moving average. The Nasdaq 100 rallied 3.9%. The Dow Jones Industrial Average added 2.8%. Amazon.com Inc. jumped 8% to lead megacaps higher. Trump said he spoke with Apple Inc.’s Tim Cook just as the iPhone maker was reported to be considering price hikes. Drugmakers rose on bets they averted the worst-case scenario as Trump targets price cuts.

The two-year yield climbed 11 basis points to around 4%. In the US investment-grade bond market, 16 companies are selling debt, including United Parcel Service Inc. and Caterpillar Inc. The Bloomberg Dollar Spot Index rose 1.1%.

The tariff arrangement, agreed to after talks in Switzerland between Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer with a Chinese delegation, will see the combined 145% US levies on most Chinese imports reduced to 30% — including the rate tied to fentanyl by May 14 — while the 125% Chinese duties on US goods will drop to 10%.

“The larger-than-expected drop in the tariffs between the US and China, while temporary, and the establishment of a framework for continued discussion, is exactly what the stock market was hoping to see,” said Carol Schleif at BMO Private Wealth.

The risk-on move suggests that investors had not expected such a positive outcome to come so quickly, according to Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. The deal is consistent her firm’s base-case that the effective US tariff on Chinese imports will settle around 30-40%.

“Investors will now be focused on signs that the temporary fix can be turned into a lasting agreement,” she said.

To Matt Maley at Miller Tabak, the news of a trade agreement between the US and China is certainly positive for the stock market. The question now is whether this change will be enough to help earnings growth reverse higher in a significant way or not.

“Think of this like a trade embargo being lifted, at least for now,” said Callie Cox at Ritholtz Wealth Management. “Tariffs are still high, Americans will likely feel the sting of higher prices, and companies probably won’t make different strategic decisions in the wake of this deal. But trade between the U.S. and China could open up more, which means more shipping and fewer empty shelves (for now).”

“There’s still a very steep hill to climb to get a real agreement,” said Jamie Cox at Harris Financial Group. “The good news is that this pause gives US companies more time to adapt and to plan for contingencies should the trade talks go sideways again. Also, with any luck, the tax package may be across the finish line and investors will no longer have to worry about trade derailing tax.”

Sentiment toward the US stock market is improving, but it’s too early for investors to sound the all-clear, according to Morgan Stanley strategists.

The team led by Michael Wilson identified four factors needed to sustain a more durable rally, but saw progress in just two: “Optimism around a trade deal with China and stabilizing earnings revisions,” they wrote in a note on Monday.

“The other two items on our checklist — a more dovish Fed and the 10-year yield below 4% without recessionary data — have yet to materialize.”

With good news on the trade front giving a boost to stocks at the start of the week, it will be up to inflation data, retail sales, and earnings to sustain the momentum, according to Chris Larkin at E*Trade from Morgan Stanley.

“There’s still debate about how much tariffs have already disrupted supply chains and potentially slowed growth,” Larkin said. “While numbers that feed into the stagflation narrative could certainly derail the bullish mood, the economy still appears to be on solid ground, as Jerome Powell noted last week.”

Swaps that track upcoming central bank meetings showed just 55 basis points of easing by December, down from near 75 basis points last week. Traders still see the first quarter-point cut in September.

Fed Governor Adriana Kugler said the Trump administration’s tariff policies are likely to boost inflation and weigh on economic growth, even with the recently announced reduction in levies on China.

Trade policies are evolving and are likely to continue shifting, even as recently as this morning,” Kugler said Monday in remarks prepared for an event in Dublin. “Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels.”