Global financial markets have experienced extraordinary volatility in the wake of President Trump’s aggressive trade policies. After initially plunging following the April 2 announcement of universal 10% tariffs and hefty “reciprocal” tariffs on “Liberation Day,” markets have staged a remarkable recovery.
The S&P 500 recently completed a nine-day winning streak—its longest since 2004—surging about 10% and erasing much of the post-tariff announcement losses, leaving the index about flat for the year. This dramatic reversal reflects investor optimism about potential tariff rollbacks following the May 12 breakthrough with China, with both countries agreeing to suspend most tariffs pending further negotiations.
Tariffs and Trade War Developments
President Trump’s trade policy has evolved through several phases since his inauguration. The initial implementation of 25% tariffs on imports from Mexico and Canada on March 4 sent markets into a tailspin.
Trump’s onerous tariffs imposed on Canada, and threats to make his northern neighbour the 51st state, have inflamed Canadians and the political leadership, resulting in a dramatic change in the economic relationship with the U.S. This has included widespread boycotting of “Made in America” products and a massive decline in the number of Canadians travelling to the U.S. for holidays. It also saw Mark Carney elected Prime Minister of Canada, as he is viewed as best suited to negotiate with Trump and hold the line on threats to annex Canada.
The global trade war escalated dramatically on April 2 with the announcement of a universal 10% tariff on all imported goods, alongside substantial so-called reciprocal levies on major trading partners. The basis on which these were calculated has flummoxed analysts because they bear no relationship to existing tariffs imposed on the U.S.
The market reaction to these was severe, with the S&P 500 experiencing its worst four-day loss since March 2020. However, a policy reversal came quickly, as Trump announced a 90-day pause on reciprocal tariffs for most countries on April 9, while raising tariffs on Chinese goods to 145%. This reversal sparked a 9.5% one-day gain in the S&P 500—its largest since October 2008.
Recent developments suggest the U.S. is willing to de-escalate the trade war. The U.S.–China agreement to suspend most tariffs includes the U.S. “reciprocal” tariff on China falling from 125% to 10% (though a separate 20% tariff related to fentanyl remains). Beijing will similarly cut its retaliatory levies on U.S. goods to 10% from 125%. The outline of a trade deal between the U.S. and the U.K. earlier in the week also served to reinforce the 10% tariff baseline.
Impact on Equity Markets
While the stock markets have rebounded impressively, questions remain about sustainability. As financial columnist James Mackintosh noted recently, “Stocks fell a lot, perhaps too much. They have now rebounded a lot, perhaps too much.” The current dynamics suggest investors are pricing in a scenario where 10% tariffs represent the worst case, rather than the starting point. Given Trump’s erratic nature and reliance on tariffs to achieve global objectives, the risks of future escalation in the trade war cannot be discounted.
The tariff relief rally in equities has been notably uneven beneath the surface. A handful of mega-cap tech companies with strong earnings have disproportionately driven the rebound. Defensive sectors, such as consumer staples and utilities, have also outperformed. Meanwhile, economically sensitive sectors such as energy and consumer discretionary continue to lag, indicating persistent concerns about economic fundamentals.
Interest Rates and Bond Yields
The most unexpected development during Trump’s first 100 days has been the atypical reaction of the bond market to the tariff announcements. Instead of investors fleeing to the safety of Treasuries during market stress as usual, Treasury yields rose sharply after the April 2 tariff announcement. The 10-year yield spiked a total of 50 basis points in the week ending April 11, marking its biggest weekly increase since 2001, while the 30-year yield climbed 48.2 basis points in the same period—its largest weekly advance since 1987.
This surprising market move reflects investors calling into question the status of U.S. Treasuries as the world’s safe-haven asset. It also signalled investor concerns that tariffs would exacerbate inflation at a time when the Federal Reserve may need to cut rates to support economic growth. The Fed acknowledged this dilemma in its May 7 statement, with Chair Jerome Powell noting that sustained tariffs would likely “generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
Interest rate futures traders are now expecting at least three Fed rate cuts this year. At the same time, the 10-year Treasury yield has stabilized at 4.17%, down from nearly 4.6% at its recent peak but still elevated compared to historical standards.
Supply Chain Disruptions
Early indicators of supply chain disruption are already visible, and this is a cause for concern. Cargo volumes from China plummeted about 35% in recent weeks, as the 145% tariff rate effectively created a trade embargo. At the Port of Los Angeles, imports were expected to decline by 35% over a one-week period, as companies reduced their bookings of container shipments across the Pacific.
The first-quarter U.S. GDP contraction reflected businesses racing to import goods ahead of tariff implementation, artificially front-loading economic activity. With ships from China now significantly reduced and uncertainty still high despite recent negotiations, many businesses remain in limbo regarding inventory planning and sourcing alternatives.
Currency Effects and Corporate Earnings
The dollar has experienced a significant decline, reaching three-year lows against the euro and 10-year lows against the Swiss franc. This currency weakness will impact corporate earnings globally.
For U.S. multinationals with significant overseas sales, a weakening dollar can boost earnings when foreign revenues are converted back into dollars. However, for import-dependent domestic companies, a weaker dollar raises input costs and squeezes margins. Meanwhile, European companies with U.S. exposure face the opposite challenge—the euro’s strength reduces the value of U.S. earnings when converted back to local currencies.
Major European companies such as SAP SE, Heineken, and BioMérieux have already flagged currency headwinds during recent earnings calls. Morgan Stanley strategists estimate that each 5% rally in the euro against the dollar reduces earnings growth in the MSCI Europe gauge by 1.5 to 2 percentage points.
Earnings estimate revisions reflect growing pessimism. S&P 500 earnings-per-share growth projections have been cut to 7.3% from 11.4% at the start of the year, while Europe’s Stoxx 600 earnings growth estimates have turned negative, falling to -2% from +3% in January.
As the economy absorbs the impact of tariffs over the coming months, the third quarter may serve as the calm preceding renewed pressure on corporate earnings. The convergence of trade barriers, currency headwinds, and potential pullbacks in consumer spending creates a challenging outlook for global corporate profitability through the remainder of 2025.
Long-Term U.S. Reserve Currency Prospects
The dollar’s recent weakness and its implications for the greenback’s status as the world’s reserve currency have become a subject of much debate. Commerzbank analysis suggests the dollar is likely to fall over the long term as President Trump’s policies appear to lack checks and balances. Multiple factors could contribute to dollar weakness, including perceived threats to Federal Reserve independence, continued tariff risks, and potentially higher Treasury yields resulting from expansionary fiscal policy.
Harvard economist Ken Rogoff, former IMF chief economist, reinforces this view, characterizing Trump’s tariff policy as problematic due to its randomness and unpredictability. Rogoff sees Trump as accelerating structural changes already underway in the global monetary system.
Rise of Reserve Currency Alternatives
Rogoff also notes that the dollar remains overvalued and predicts its use will decline over time. Even before recent trade tensions, U.S. sanctions policies had already prompted countries like China to consider alternatives to dollar-based transactions.
The BRICS coalition (Brazil, Russia, India, China, South Africa, plus new members Egypt, Ethiopia, Iran, UAE, and Indonesia) has expanded significantly, now representing about 45% of the world’s population and generating more than 35% of global GDP. BRICS aims to challenge Western-dominated institutions of global economic governance and reduce the world economy’s reliance on the dollar.
In the near term, Rogoff recommends diversification, particularly into European assets, suggesting a potential tipping point away from U.S. investment dominance.
The dollar’s privileged position has yielded significant benefits for Americans, including lower interest rates on mortgages and car loans due to global demand for the dollar. Should the dollar’s role diminish, Americans could face higher borrowing costs across the economy.
While the dollar remains the world’s primary reserve currency, and it is still too early to predict its demise, these combined pressures highlight that profound change lies ahead. That likely means the euro, yuan, and potentially new instruments developed through BRICS cooperation will play a larger role in facilitating global financial transactions and trade in the future.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca