Why the Stock Rally May Be in Trouble After the White House Backtracked on Tariffs
The U.S. stock market’s recent rally is facing significant challenges as the White House has seemingly retreated from its bold tariff announcements. According to a recent note from Sevens Report Research, the stock market has already incorporated this backtracking, making it increasingly difficult for the rally to endure.
Understanding the Backtracking on Tariffs
Tom Essaye, the founder and president of Sevens Report Research, shed light on the magnitude of the administration’s backtracking from the “liberation day” tariffs proclaimed by President Donald Trump on April 2. “The Trump administration has seriously backtracked on the April 2 announcement, including a delay while negotiations take place and exempting major categories of imports,” he noted.
This exemption is pertinent as it covers crucial imports such as computer chips, electronics, pharmaceuticals, and automobiles. These changes come amid growing concerns that the original large tariffs could burden the U.S. economy and contribute to rising consumer goods prices.
Recent Market Performance
This turn of events did not go unnoticed by investors, as evidenced by the S&P 500 index closing down 0.6% at 5,650.38 on a recent Monday. The index had enjoyed a nine-day winning streak before this dip, marking its longest such stretch since November 2004.
Essaye observed that while the initial aftermath of the “liberation day” was not as grim as projected, he does not believe the current circumstances are sufficient to drive the S&P 500 sustainably higher. He maintained his outlook, suggesting a range of approximately 5,100 to 5,500 for the index.
Potential Consequences for Investors
Investors are slowly recognizing that the anticipated benefits of the tariff backtracking may already be factored into market prices, leading to a potential “sell-the-news” reaction when trade deals are ultimately announced. As negotiations with trading partners continue, markets have previously responded positively to reports indicating a potential easing of trade tensions with China.
However, Essaye cautioned that “tariffs will be substantially higher than they were on January 2, and that is a headwind on growth.” He emphasized that the market remains vulnerable to disappointing news regarding tariffs. On average, the S&P 500 has reported a decline of 3.9% for the year 2025, reflecting unease surrounding economic conditions and trade relations.
Market Sentiment and Defensive Strategies
The collective sentiment among investors remains that, while hard economic data appears robust, the real impact of tariffs and uncertainty has yet to be fully observed. Essaye remarked, “Like earnings, the risk to growth is one direction: slower.” This highlights an ongoing worry regarding the market’s momentum and its ability to sustain gains amid evolving trade policies.
In light of this scenario, Essaye advises a more defensive position in investing strategies, favoring sectors such as utilities, consumer staples, and healthcare. Emphasizing the importance of diversification, he pointed to Invesco S&P 500 Equal Weight ETF (RSP) as a viable investment option along with exchange-traded funds focused on volatility minimization, like the iShares MSCI USA Min Vol Factor ETF (USMV). Additionally, he advocates for high-quality stock exposure through the iShares MSCI USA Quality Factor ETF (QUAL).
Conclusion
While the stock market has enjoyed a rally in recent weeks, the implications of the White House’s tariff backtracking pose considerable risks for future performance. Essaye’s assessments suggest that while the last month may not have been as negative as initially feared, it does not equate to enduring stability or growth. The upcoming months could bring increased volatility as investors navigate ongoing negotiations and the reverberating effects of tariff actions.