Trump vs. China: Who blinks first?

How is the U.S.-China trade war likely to play out now that Beijing is seemingly playing hardball?

Market Recap

• Equity markets rallied this week, with no news considered good news for a change.
• The S&P 500 jumped 4.6%, led by strong gains in severely beaten down sectors—technology, consumer discretionary and communication services.
• The TSX added 2.1% on the week with technology, health care and financials leading.

China

Last week, U.S. President Donald Trump attempted to lure China back to the negotiating table with potential concessions, but China rebuked the offer, stating that they need to see concrete action before resuming negotiations. In our view, this is a sign that the U.S.-China trade war will continue to escalate, at least for the time being. Neither side wants to look weak in the public sphere, but behind closed doors, it’s likely that they’re both trying to figure out what the other side truly wants. Both economies are beginning to feel the effects of the tense macroeconomic environment, and while China is starting to rebound a bit, the U.S. is beginning to slow down. Each side is looking for something to reignite their economic momentum, but neither side wants to give up anything big. The result is the stalemate that we’re currently seeing. The one thing that surprises me is that Trump hasn’t moved quickly to sign individual deals with key partners. By lining up allies, he’d be able to put additional pressure on China and improve the U.S.’ negotiating position. It’s possible that he will do that concurrently with negotiations with China, but for now, Trump is lacking that ace in his back pocket, and the only real pressure on China is the fact that the U.S. is a large and attractive export market. Going forward, China is likely gaming out multiple scenarios based on tariffs at various levels, while also developing a contingency plan to be put in place if nothing changes. The U.S., for their part, appears to be improvising, so it’s unclear how deeply they’re considering the consequences of various scenarios. The U.S. electorate is likely to be supportive of some tariffs on China—for the past several years, it’s been one of the few policies that Democrats and Republicans have been able to agree on. But if Trump is viewed as going easy on China compared to some of the U.S.’ traditional allies, that could prove to be a political liability.

Bottom Line: Neither China nor the U.S. wants to look weak in the public sphere, so our expectation is that the trade conflict will continue to escalate in the near term.

Earnings Guidance

Recently, we’ve seen a lot of negative forward guidance from corporate leaders, as well as some companies retracting their guidance on account of the uncertainty in the marketplace. The question is: should we be taking these developments at face value, or are companies’ merely lowering expectations, meaning that opportunities could emerge? Unfortunately, we think it’s closer to the former than the latter. The fact that some companies have put out multiple scenarios for guidance tells us that the uncertainty is real. Companies simply don’t know how they should be investing, and that makes it difficult to project future earnings with any degree of certainty. This is a moment where having face-to-face meetings with management can make a real difference, as compared to reading research reports from third parties. In one-on-one conversations, you’re able to ask follow-ups and explore what-if scenarios—for instance, is hypothetical scenario A significantly worse than scenario B, or only marginally worse? Nuanced answers to those kinds of questions provide insights into a company’s standing—helping to give sense of which companies may be able to weather the storm, and which will lose competitively more each time tariffs go up—without having to rely on concrete numbers based on dubious projections. It is also worth noting that the impact of tariffs varies from sector to sector—it’s not consistent, except to the extent that the overall outlook is murky.

Bottom Line: The uncertainty in the marketplace is real, and in that environment, we believe that face-to-face conversations with business leader are more valuable than dubious forward guidance.

U.S. Dollar

The recent slide of the U.S. dollar (USD) has negative impacts for many countries and regions around the world, including Europe, where members of the Stoxx 600 index (essentially the European version of the S&P 500) get 60% of their sales from overseas.¹ How is this affecting our asset allocation? Currently, we’re neutral on all regions—the U.S., Canada, Europe, Australasia, and the Far East (EAFE), and Emerging Markets (EM)—but with an overweight to China due to recent momentum, especially in the Chinese Tech sector.. Embedded in all of these positions are expectations for the USD. For instance, a weaker USD tends to be good for EM, because their debt is in that currency. On the other hand, Canadians who buy U.S. equities are taking a hit from a depreciating USD. In general, we’ve timed our positioning moves well so far in 2025—in fact, from the beginning of the year, we were among the few to predict that the Canadian dollar (CAD) would appreciate once the tariff process had begun to play out, and that’s exactly what has happened. A weaker USD does provide some cushion for Canadians spending money on U.S. goods, which could provide a boost to Canadian consumer confidence, but it also means that our exports are costlier, so there are some negative implications on that front. Overall, from an investor perspective, we think a weaker USD/stronger CAD is positive, because if you’re investing more in Canada compared to the U.S., you don’t have to deal with the currency headwind that you would have faced over the last few years.

Bottom Line: A weakening USD has implications all over the world, but in general, we view it as a positive for investors in the Canadian market.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Trump’s trade war goes global.

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Originally Posted April 28, 2025 – Trump vs. China: Who blinks first?

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