- Stock markets welcome US-China 90-day tariff reduction agreement
- Companies must adapt once more (and wait to see if the deal sticks)
- Economic data likely to remain muddy as rules and laws continue to change
- Latest US NFIB smaller companies index likely to be informative on Tuesday
“Financial markets are welcoming the trade deal between the US and China which reduces tariffs between the two nations from the extreme and unsustainable level reached in the immediate aftermath of Liberation Day in early April, but this new agreement only lasts for 90 days, does not eliminate the new levies and could yet come with strings attached,” says AJ Bell investment director Russ Mould.
“Companies involved in US-China trade flows must adapt once more, too, and it cannot be easy for them to keep up, especially if they are smaller firms, reliant on a narrower management, customer and product base, so Tuesday’s latest monthly National Federation of Independent Business (NFIB) smaller companies optimism index in the USA could give investors and economists a bottom-up perspective on the wider macroeconomic outlook.
“Firms with less than 500 staff make up the vast majority of US companies and figures from the US Bureau of Labor Statistics show that they employ around 40% of all working Americans who are not involved in agriculture. The multiplier effect of their hiring and spending plans upon their local communities and – in aggregate – the US economy is therefore potentially considerable.
“Confidence had already begun to ebb before President Trump’s tariff announcements in early April. The NFIB survey dipped in each of January, February and March, albeit from the five-year high reached in late 2024.
Source: NFIB, LSEG Refinitiv data
“This loss of faith in the outlook is reflected in smaller companies’ plans to hire, as fewer and fewer of them intend to add to their workforce.
Source: NFIB, LSEG Refinitiv data
“The better news from the Trump administration comes in the form of capital expenditure plans. One goal of the tariff policy is, in theory, to decrease American reliance on overseas and Chinese production of goods, reshore that output and, ultimately, create jobs. How the new, 90-day tariff agreement fits with that specifically remains to be seen, but smaller companies are responding, as their spending plans are on the up. This could conceivably, where possible, include greater automation to increase capacity and efficiency.
Source: NFIB, LSEG Refinitiv data
“How all of this washes out in the headline US economic numbers is hard to divine, as the first-quarter’s initial estimate of a 0.3% annualised drop suggests. Companies had pulled forward purchases in preparation for tariffs and those imports, along with an inflow of gold, depressed the headline GDP figures, from which imports are subtracted and to which exports are added.
“Government spending was weak in the first quarter, thanks to Elon Musk and the DOGE, but consumer spending held up and business investment was strong. A reduction in uncertainty over trade and tariff policies could help smaller companies plan more effectively and, as seen from Monday’s gains, lift sentiment across financial markets.
“The main US small-cap benchmark, the Russell 2000, was down 9% year-to-date as of Friday’s close, compared to a 7% drop in the Nasdaq, a 3% decline in the S&P 500 and a 2.7% retreat in the Dow Jones. A rally in the Russell may help to set the foundations for a wider recovery in US stocks, and the Russell 2000 is showing the greatest gain over the past month, to show just how sensitive small caps are to changes in the macro outlook.”
Source: NFIB, LSEG Refinitiv data
