Weekly Investment Update (05/16/2025)

The next Weekly Investment Update will be published on May 30 due to the Memorial Day holiday.

This week brought encouraging signs that we are moving past the peak of uncertainty surrounding tariffs. U.S. equity markets opened sharply higher on Monday after the U.S. and China announced a temporary agreement to reduce tariffs. This de-escalation in trade tensions boosted investor optimism, with the S&P 500 rising 3.3% and the NASDAQ climbing 4.3% on the day. Following this rally, the S&P 500 is now up 1.0% year-to-date, while the NASDAQ remains down 0.7%, despite recovering 22% and 29%, respectively, from their April 7 lows.

On the economic data front, there were some signs of weakness with retail sales numbers coming in lower than expected. The pull forward in spending ahead of tariff transmission appears to be fading as consumers look to rein in spending against the backdrop of an uncertain economic outlook caused by tariffs. Walmart, however, reported solid sales and earnings growth, though management cautioned that tariffs and supply chain disruptions could drive prices higher later this year. Consumer sentiment surveys continue to show sharp polarization along political lines, making broad trends difficult to interpret. Bessemer continues to monitor the hard economic data closely for any deterioration caused by the tariff uncertainty.

U.S.-China Tariffs and Retaliatory Measures Significantly Reduced After Geneva Trade Talks

What is happening: The U.S.-China trade talks in Geneva culminated in a 90-day suspension of most tariffs announced on or after liberation day. In practice, this means the U.S. lowered tariffs on Chinese imports from 145% to the 30%-40% range , while China reduced tariffs on U.S. goods from 125% to around 30%. Additionally, China agreed to remove non-tariff countermeasures, including heavy rare earth export bans and anti-monopoly investigations into some U.S. companies. The temporary détente is intended to provide relief to businesses and consumers affected by the trade tensions and to pave the way for further negotiations.

Both countries have expressed optimism regarding the outlook, with President Trump describing the outcome as a "total reset" in U.S.-China relations, and Chinese officials framing it as a victory for national sovereignty. Separately, China announced another comprehensive monetary stimulus package last week to bolster its slowing economy, including a 0.1% cut to the benchmark interest rate and a 0.5% cut to the required reserve ratio for banks.

Why it matters: The temporary suspension of the U.S.-China trade war is a major de-escalation and appears to be an acknowledgement from both countries that the previous path was too economically damaging to be sustainable. For example, data last week showed China’s April factory activity contracted at the fastest pace in 16 months. With reduced trade-related headwinds, China’s economic growth may stabilize, which could lead the central government to scale back fiscal stimulus later this year. In the U.S., the new agreement lowers the effective tariff rate on imports to approximately 15% from a peak of 27%, significantly reducing the near-term risk of a recession. Additionally, liberation day tariffs on non-China countries appear less likely to resume at the end of their respective 90-day pause on July 9.

Looking ahead, the negotiation offers a chance to address more structural issues, such as intellectual property rights and forced technology transfers. While further tariff reductions on Chinese imports are possible, they can also resurface if subsequent negotiations are unsuccessful. Notably, China has yet to make new concessions beyond removing countermeasures implemented after the liberation day announcement. Meanwhile, lower tariffs could slow progress toward diversifying U.S. manufacturing away from China.

Even if tariffs on Chinese imports do rise again, they are unlikely to return to triple-digit levels. Moreover, successful negotiations between the U.S. and other countries over the next two months could offset some of the negative economic impact. Bessemer’s equity portfolios remain underweight China overall, while opportunistically investing in select Chinese companies with attractive structural growth characteristics.

Inflation Eased in April Ahead of Potential Tariff Impact

What is happening: The core consumer price index (CPI) rose 0.2% in April, slightly below expectations for a 0.3% increase, maintaining a 2.8% annual increase. Headline CPI also rose 0.2%, bringing the annual pace down to 2.3% — a four-year low — largely driven by lower gasoline prices. Services inflation remained elevated at 3.7%, supported by a rebound in motor vehicle insurance costs. However, this was partially offset by continued declines in airline fares and hotel prices. Shelter inflation stayed firm, with rent and owners’ equivalent rent rising 0.34% and 0.36%, respectively — in line with their recent trends.

Core goods inflation ticked up modestly by 0.06% year-over-year, ending the deflationary trend that had persisted since early 2024. While the increase wasn’t broad-based, certain goods categories such as appliances and audio equipment may be reflecting early impacts of new tariffs. That said, prices in these segments have historically been volatile, and similar fluctuations have occurred in the absence of trade policy shifts, warranting caution in attributing solely to tariffs.

Why it matters: With April sales largely reflecting pre-tariff inventory, it is too early to assess the full impact of recent tariff announcements on consumer prices. Still, the modest uptick in core goods inflation since last fall may hint at some early front-running of tariffs amid resilient demand.

Looking ahead, tariff policy remains the biggest near-term risk to the inflation outlook. Tariffs are expected to begin exerting a more visible influence on prices starting in May, with further increases likely by June or July. Against this backdrop, the recent de-escalation in trade tensions with China over the weekend is notable, potentially easing some of the upward pressure on import prices and reducing market uncertainty.

Federal Reserve officials have reiterated that inflation uncertainty is a key reason for their current policy pause. Absent the risk of tariff-driven inflation, recent price trends may have supported a continuation of rate cuts from the Fed’s still-restrictive stance. In our view, the Fed is likely to remain cautious, seeking further evidence that inflation expectations remain anchored before resuming rate reductions. Bessemer’s bond portfolios have maintained longer-duration positioning given our view that rate cuts are likely to resume in the second half of the year.