Will the rally continue?
The recent relief rally in the S&P 500 is welcome, but is it sustainable? The stock market’s vulnerability is a weakness in Trump’s arsenal against China, and it’s also a barometer of his popularity. Meanwhile, the market and the U.S. economy are heavily reliant on consumer spending, with personal consumption expenditures accounting for approximately 70 per cent of U.S. Gross Domestic Product (GDP), according to the Bureau of Economic Analysis.
Given the market’s reliance on Trump’s unpredictable pronouncements and the economy’s reliance on the outcomes, placing too much confidence in a sustained near-term market really could be risky.
President Donald Trump’s ongoing trade war with China threatens to disrupt supply chains and curb consumption; therefore, it has significant implications for the U.S. economic outlook.
The imposition of a 145 per cent tariff on Chinese imports, effective April 9, has reportedly already triggered a sharp decline in shipments, just as businesses grapple with soaring costs. Importantly, equity investors have yet to experience the impact on business revenue and margins, and consumer prices, of inventory challenges and potential product shortages.
The tariffs have upended the logistics industry, with U.S. imports from China plummeting by 10 per cent in the week of 7 April and nearly 30 per cent by 14 April compared to the previous year, according to supply-chain platform Project44.
This follows a frenzy of stockpiling in early 2025, as companies rushed to frontload shipments before the tariffs took effect. The Port of Long Beach, a key gateway for Chinese goods, reported a projected 35 per cent drop in ship arrivals for May, with only 60 vessels expected compared to the usual 80. The surge in “blank sailings” – cancelled port calls due to waning demand – has further strained the system, with East Coast ports seeing a 100 per cent increase and West Coast ports a 31 per cent rise since February.
Project44 noted, “Businesses are responding decisively, pulling back on orders to mitigate tariff costs,” adding, “This strategic shift is now visible in the data, but it’s creating a supply chain nightmare that could hit consumers hard.”
The fallout is already affecting small retailers and so-called mom-and-dad businesses, which lack the resources to absorb tariff costs or diversify supply chains. The U.S. National Retail Federation warns that these businesses “will be the first to run out of inventory,” with shortages of electronics, apparel, and toys potentially emerging by summer. Some vendors are laying off staff to cover tariff costs, and understandably, the uncertainty makes planning impossible.
Adding to the complexity, the Trump administration is proposing a port fee on Chinese vessels, potentially costing carriers up to US$1.5 million per U.S. port visit. According to Gross Transportation Consulting, this could further deter Chinese imports, exacerbating port congestion as containers pile up with fewer ships to transport them.
Among the optimists, several prominent investors note stable personal debt burdens, improving delinquency rates, and a recent uptick in retail spending, particularly on electronics, as a sign of consumer resilience. However, investors should be concerned about the future, and in any case, consumers are also reportedly making only minimum credit card payments and frontloading purchases themselves.
Cracks in consumer confidence are evident. A LendingTree survey revealed that 25 per cent of buy-now, pay-later (BNPL) users are financing groceries, up from 14 per cent in 2024, with 41 per cent missing payments. People are struggling to stretch their budgets amid inflation, high interest rates, and tariff uncertainty. The survey also found 60 per cent of BNPL users juggling multiple loans, heightening financial risks.
The broader economic outlook may therefore be darkening. The International Monetary Fund recently slashed its 2025 U.S. growth forecast to 1.6 per cent, citing tariffs as a key drag. J.P. Morgan Research estimates that the tariffs could raise consumer prices by 0.2 per cent and reduce GDP growth by 0.3 per cent. Small businesses, already battered by inflation, face a precarious future, with 47 per cent of supply chain survey respondents planning layoffs within nine months.
Despite the bounce in the S&P 500, investor sentiment is turning cautious as tariff-related uncertainties weigh on corporate earnings outlooks. Sectors such as consumer discretionary and industrials, which constitute significant portions of the index, are particularly vulnerable as tariffs drive up input costs and erode consumer purchasing power. Goldman Sachs projects that a sustained 145 per cent tariff could reduce S&P 500 earnings growth by 1-2 per cent in 2025, potentially capping the index’s upside unless tariff relief or robust consumer spending mitigates the impact.
The one positive is that the Federal Reserve Put has now been replaced with a Trump Put. Whenever the stock market crashes, investors can probably rely on Trump announcing something positive, even if it’s only a Tweet on X saying it’s a good time to buy! But of course, investors are unlikely to return to paying record-high price-to-earnings (P/E) ratios while Trump remains in office, and there’s a risk of a continuing bipolar approach to policy and international negotiations.
Some market participants, however, remain cautiously optimistic. A proposed tariff cut under discussion by the Trump administration could alleviate pressure on supply chains, potentially boosting market confidence. Yet, with 54 per cent of U.S. containerised imports from Asia originating in China, prolonged trade tensions could lead to persistent inflationary pressures, prompting the Federal Reserve to maintain elevated interest rates. This scenario weighs on equity valuations, particularly for growth-oriented S&P 500 companies.
As the U.S. summer approaches, the spectre of thinning store shelves looms, particularly for goods reliant on Chinese imports. While a 90-day tariff pause for non-Chinese trading partners offers temporary relief – the ongoing U.S.-China trade standoff and current retaliatory 125 per cent Chinese tariffs on U.S. goods threaten to prolong economic and investor uncertainty – suggesting expectations of a sustained rally in the S&P 500 may be premature.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
