Donald Trump pushes for 15%-20% minimum tariff on all EU goods US president also rejects reducing 25% sectoral duties on cars from the bloc, say diplomats
(…) In a sign of the mounting pessimism in Europe over the shape of a deal, Germany’s Chancellor Friedrich Merz on Friday warned Washington remained sceptical about offers to reduce the sectoral tariffs. Merz added: “Whether we can still create sectoral rules, whether we can treat individual sectors differently from others, is an open question.
The European side supports this. The American side views it more critically.” If Trump insists on permanent reciprocal duties of 15 per cent to 20 per cent they would be as high as they were when trade talks began in April, and could push Brussels towards retaliation, said the senior EU diplomat.
The US has also imposed sectoral tariffs of 50 per cent on EU steel and aluminium. “We don’t want a trade war, but we don’t know if the US will leave us a choice,” they said.
A second EU diplomat added “the mood has clearly changed” in favour of retaliation. “We are not going to settle at 15 per cent,” they said. (…)
China Defends Growth Model, Plans Consumption as Greater Driver
(…) “Most of China’s production is intended to meet domestic demand,” Vice Finance Minister Liao Min said in an interview Friday near Durban, South Africa, where he was attending a gathering of Group of 20 policymakers. “When there’s demand from abroad, China exports accordingly. This does not mean, however, that China is trying to dominate every market.” (…)
“China’s certainty and stability are the greatest contributions it makes to the world today, because what the global economy needs most right now is stability and certainty,” Liao said. “We are steadily advancing toward an economic model driven by consumption, while at the same time maintaining a relatively balanced foreign trade.” (…)
Liao highlighted that, over the past four years, consumption has driven an average of 56.2% of China’s GDP gains. That’s 8.6 percentage points higher than during 2016-2020 period, he said. Domestic demand as a whole accounted for 86.4% of China’s growth, the vice minister said.
He also said China’s current-account surplus — the broadest measure of trade, as it includes services and some financial transactions — was about 2.2% last year, a level “recognized globally as reasonable” and indicating the share of its shipments worldwide is “not excessively high.”
China’s critics have used other metrics. A top US Treasury official last year cited figures showing China’s manufacturing-goods trade surplus approaching 2% of world GDP, roughly twice the share of Japan’s in the early 1990s. Current Treasury Secretary Scott Bessent has repeatedly called China “the most imbalanced economy in the history of the world.”
Speaking at a congressional hearing last month, Bessent charged Beijing with “trying to export their way out” of the nation’s domestic real estate slump.
Liao’s comments come ahead of an expected fresh round of trade talks with the US in the coming weeks. He didn’t offer any specific comment on Bessent’s criticism in the interview Friday. The vice finance chief has been a key member of the country’s team of negotiators that reached a trade-war truce with their American counterparts in Geneva, and again in London, earlier this year. (…)
For the longer term, the authorities will seek to expand service industries and promote the green and digital sectors, with a goal of propelling economic transformation — beefing up consumer spending power as jobs and incomes rise, Liao said.
Meanwhile, the government will continue strengthening social safety nets, including pensions to ensure stable growth in consumer spending over the long run, he said. (…)
(…) A four-year slump in China’s property sector is showing few signs of easing after a decline in home prices accelerated in June, and major developers reported lackluster earnings for the first half of the year. That has left investors pinning their hopes on government support to spark a turnaround, with speculation about an aid package fueling the biggest one-day jump in developer shares in five months earlier in July. (…)
Chinese President Xi Jinping refrained from announcing aggressive stimulus at the Central Urban Work Conference, and instead advocated a more measured approach to urban planning and upgrades. (…)
- China land sales in smaller cities hit lowest level in a decade Slump in transactions highlights difficulty of reviving national property market
(…) Data from financial information provider Wind shows the total value of all land transactions in third-tier mainland Chinese cities, as ranked by population and economic development, fell 4 per cent to Rmb362bn ($50bn) in the first half of this year on the same period last year, despite a slight rise in sales for residential use. (…)
The data showed that across 337 cities in China, sales rose 8 per cent to Rmb1.2tn in the first half, fuelled by increased activity in first- and second-tier urban areas. (…)
First green shoots in China resid market. Land sales have stopped falling and have actually increased in Tier-1-2 cities where it should normally begin.
Japan Election Throws a Wrench in Trade Talks Bad night for ruling coalition could cost prime minister his job and make it harder to strike a deal with Washington before August tariff deadline
Japan’s ruling coalition suffered a significant loss in a parliamentary election Sunday, a setback that risks derailing delicate trade negotiations with the U.S. just weeks before punishing tariffs are set to take effect.
Prime Minister Shigeru Ishiba had gambled that his tough stance on trade with President Trump would help cement his shaky grip on power after less than a year in the job and an electoral snub last fall.
Instead, he lost his ruling coalition’s majority in an election for the Japanese parliament’s upper house, having already lost its lower-house majority in a vote in October. Polling showed Japanese voters were far more focused on inflation and immigration than they were on U.S. tariffs, a combination that has proved toxic to incumbent parties around the world and propelled the rise of populist alternatives.
A maverick lawmaker who secured the premiership on his fifth attempt in September, Ishiba could now face calls to resign, though he insisted Sunday that he would stay on as talks with the U.S. are at a critical moment. His ouster would risk igniting political turmoil just weeks before an Aug. 1 deadline to strike a deal on trade with Washington or accept tariffs of 25% on U.S. imports from Japan. Such a steep increase in duties in Japan’s largest foreign market risks tipping its export-heavy economy into recession, economists say.
“We are currently engaged in truly down-to-the-wire tariff negotiations with the U.S.,” Ishiba said Sunday in a television interview as the results were coming in. (…)
Ishiba’s weakened position means his government may struggle to persuade enough lawmakers to back any agreement it does manage to make with Washington, especially if it involves concessions on sensitive sectors such as agriculture or autos. (…)
Talks with the U.S. have become bogged down over auto tariffs in particular. The auto sector is a mainstay of Japan’s economy. Tokyo has been seeking relief on a 25% levy Trump imposed on imported cars, which is squeezing profits at automakers including Toyota and Honda. (…)
EARNINGS WATCH
From LSEG IBES:
59 companies in the S&P 500 Index have reported earnings for Q2 2025. Of these companies, 81.4% reported earnings above analyst expectations and 13.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 7.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.3%.
Of these companies, 79.7% reported revenue above analyst expectations and 20.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.
In aggregate, companies are reporting revenues that are 1.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.The estimated earnings growth rate for the S&P 500 for 25Q2 is 6.7%. If the energy sector is excluded, the growth rate improves to 8.6%.
The estimated revenue growth rate for the S&P 500 for 25Q2 is 4.0%. If the energy sector is excluded, the growth rate improves to 5.3%.
The estimated earnings growth rate for the S&P 500 for 25Q3 is 8.4%. If the energy sector is excluded, the growth rate improves to 9.1%.
Trailing EPS are now $254.26. Full year 2025e: $263.73. Forward EPS: $280.83e. 2026e: $300.72.
Revisions are up for most sectors:
Tech companies are seen keeping their pace but analysts now expect Industrials and Materials earnings to contribute “materially”:
This when the effective tariff rate rises to 19% by early 2027 per Goldman Sachs:
It seems that tariffs have become irrelevant:
US equities have largely ignored the most recent tariff announcements. The S&P 500 notched a new record high this week, and the GS Tariff Risk basket is just 4% off its high. Our client conversations indicate that many investors believe tariff rates will eventually settle lower than what the recent announcements have indicated.
In addition, recent economic data releases have indicated a smaller impact from tariffs on consumer spending, inflation, and the labor market than many investors feared earlier this year. This week, June core CPI rose 0.23% month-over-month, below consensus expectations, while retail sales (+0.6%) and jobless claims (221k) both came in better than consensus expectations.
Equity investors appear to be looking through potential near-term economic and earnings weakness and focusing instead on the prospect for robust growth in 2026. Despite some recent weakening in the hard economic data, the equity market continues to price an outlook for healthy economic growth.
The performance of the GS Cyclicals vs. Defensives basket pair appears to be pricing a real US GDP growth outlook above our economists’ forecast of 0.8% in 2H 2025 but close to their 2H 2026 forecast of 2%.
Similarly, despite consensus expectations for just 4% year/year EPS growth in 2Q, earnings revision breadth shows a widespread recent improvement in analysts’ forecasts for 2026 EPS.
Our forecast for further near-term upside to the S&P 500 is predicated in part on investors’ continued willingness to focus on the solid longer-term trajectory of earnings growth. We forecast the S&P 500 will rise by 5% during the next 6 months to 6600 and by 10% during the next 12 months to 6900.
Recent US dollar weakness is a tailwind to S&P 500 EPS, but a smaller factor than many investors assume. The S&P 500 in aggregate generates 28% of its revenues overseas, roughly unchanged relative to last year. In our macro model, a 10% weakening of the US dollar is associated with a boost of roughly 2-3% to S&P 500 EPS, all else equal. In addition, more companies tend to beat consensus sales estimates when the USD weakens, although investors typically do not reward FX-driven sales beats the way they reward constant-currency beats.
The trade-weighted US dollar has depreciated by 7% YTD. Our FX strategists expect a further 4% weakening through year-end and a 6% total decline by year-end 2028.
The largest US tech stocks have the highest international revenue exposure, meaning they receive an above-average tailwind from USD weakness but also face above-average risk from trade conflict. The Russell 2000 small-cap index generates 20% of its sales domestically while the Nasdaq-100 derives nearly 50% of its revenues outside the US. On a sector basis, Information Technology is the only S&P 500 sector with over half of its revenues from outside of the US.
A basket of S&P 500 stocks with the highest international sales exposure (GSXUINTL) has outperformed a basket of stocks with the highest domestic sales exposure (GSXUAMER) by 4 pp YTD alongside the weakening US dollar. The recent pattern of relative outperformance of international facing stocks is broadly consistent with previous episodes of dollar weakness.
However, while our economists expect continued USD weakness, they also expect US economic growth to outpace most other major economies in both 2025 and 2026, which should provide a relative tailwind to domestic-facing firms. In addition, further trade conflict escalation would create the largest risk for companies with elevated international sales exposure.
Goldman’s data show that stocks of companies with above average international exposure are up 4% YtD while those primarily US sensitive are down 4%. But at the same time, companies most exposed to government spending are up 13% YtD.
GS data also reveals that companies favored by hedge funds are up 8% YtD while mutual fund overweights are down 8%. Momentum wins over value.
While the S&P 500 is up 8% and its equal-weight brethren 6%, the market breath is pathetically low…
…largely concentrated in 10 stocks, now 40% of the index:
Callum Thomas illustrates the historical concentration differently:
The Tech “Super Sector” (which corrects for the GICS reclassification that removed a bunch of tech stocks from the tech sector and put them in things like communication services and consumer discretionary) has surpassed the dot-com bubble heights, and at the other end of the spectrum, the defensive sectors (consumer staples, utilities, healthcare) have reached a record low weighting —and even traditional cyclicals (financials, industrials, energy, materials) have been crowded out.
Passive index investors take note: the average index investor has been drifted into a portfolio that is tech heavy and light on defensives + diversification.
We can see that there is some justification for rising tech market cap and valuations given the rising weight of S&P500 earnings generated by the tech and tech related sectors… but 2 historical causes for concern arise.
First, cyclicals’ earnings weight is rolling over — that’s often been a bearish sign in the past, but mostly because of weakness in cyclicals. I’d say though that this time it’s more about cyclicals being crowded out by tech (which raises its own question around sustainability).
Second, defensives’ earnings weight has reached the low end of the range — a contrarian signal, something you see toward the peak of the market cycle (for good reason: defensives plod along, get crowded out by the growthier hotter parts of the market… and then claw their way back by just plodding when everyone else suffers in recession or downturn).
And then moving on, you also notice that aside from the typical index investor holding a tech-heavy portfolio, it’s also an increasingly expensive portfolio. The combined PE ratio for US tech stocks has risen to new post-dot-com heights.
Source: Chart of the Week – Speculation Heights
Ed Yardeni:
We would rather see the market move higher on earnings than on higher valuation, which would increase the risk of a meltup followed by a correction, as we saw at the beginning of this year.
Our Blue Angels analysis indicates that the S&P 500 continues to follow the lead of its forward earnings to fresh record highs despite the recent volatility in its forward P/E (chart).
Bloomberg:
Priced in?
The second-quarter earnings season is off to a ripping start, with consumer strength powering resilient corporate profits. In the stock market, however, the reaction has been fairly quiet, an ominous sign that much of the good news is priced in — and investors are punishing disappointments.
Take financials, which reported blockbuster numbers last week that failed to juice their shares.
Similarly, streaming platform Netflix exceeded outlooks in every major metric, and United Airlines was upbeat about travel demand gaining steam. Yet, investors largely reacted to these numbers with a collective shrug. Netflix sank 5.2% Friday despite its strong performance.
John Mauldin notes that
Year-to-date through last week, the biggest Mag-7 gains were in Nvidia, Meta and Microsoft, all of whom have been boosted by strong positions in the artificial intelligence boom. Amazon was next with a much smaller gain.
Google, Apple and Tesla are all in the red this year, each for its own reasons. Google has been hurt by loss of advertising revenue. Apple has hurt by tariffs and also widely criticized for its failed “Apple Intelligence” AI strategy. Tesla’s CEO has had his hands full with other projects.
The good news here is that company-level risk still matters. Simply being big isn’t enough to keep a stock price moving higher. Management still needs to have the right vision and execute it well.
Trump’s policies initially spooked investors but large earnings beats spooked the spooked. FOMO came back and risk aversion declined to levels seldom seen (and sustained).
Actually, investors seem to completely dismiss skyrocketing tariffs (TACO or irrelevant, offset by strong demand and/or productivity?)
Beats like we saw in the last few quarters (and so far this quarter) are rather unusual:
Mohamed El-Erian in Foreign Affairs presents the good and bad scenarios:
(…) In trying to predict what will happen, economic forecasters have generally been pulled in one of two extreme directions. The first is optimistic about where the current bumpy journey will lead.
According to this vision, the Trump administration would succeed in shrinking the bureaucracy, eliminating unnecessary regulations, and curtailing spending—thus creating a more efficient government that is less encumbered by debt as growth picks up. The economy would emerge from the present turmoil with an unleashed private sector that can better seize exciting productivity-enhancing innovations in areas in which the United States already leads, such as artificial intelligence, the life sciences, robotics, and (down the road) quantum computing.
Washington may still have higher tariffs than it did before Trump came into office. But those tariffs would have produced a fairer trading system, in which other countries have dismantled their higher tariffs and onerous nontariff barriers while also assuming more of the cost for providing global public goods. This scenario is not just reminiscent of the early 1980s reforms pursued by Reagan and Thatcher. It goes beyond. It would entail a reset of not only the domestic economic order but the global one, as well.
To achieve this outcome, of course, many things would have to go right.
Most important, higher growth would need to materialize quickly to alleviate the forming debt overhang. Financial markets would need to show patience, absorbing uncertainties about the dollar and U.S. government bonds. Internationally, countries would need to trust that Washington would stick to whatever it agreed to on trade and tariffs. They would need to become more comfortable with their still sizable holdings of dollars and treasuries. And they would need to navigate what are likely to be persistent tensions between China and the United States, the world’s two economic superpowers.
Then there is the Federal Reserve. In a world of higher productivity, lower inflation, and less threatening deficits and debt, the central bank should feel more willing and be more able to significantly cut rates. But to get there, Trump and Powell would have to resolve their differences, with either Powell stepping down or Trump showing greater patience until May, when Powell’s term is scheduled to end.
Trump might also get a rate cut in a more pessimistic scenario—but not in the way he wants.
In this world, Washington does not get a handle on its swelling deficits. Trust in institutions continues to erode, as worries increase about the rule of law and executive overreach. The United States displays ever less interest in both setting and abiding by global standards and regulations. Other countries reconsider their role in the global order. At a minimum, they are forced into greater self-insurance, seeking more domestic resilience in the face of a changing world. They could even end up forming multicountry alliances that would worry the United States not just economically but also with respect to national security.
This scenario would effectively repeat much of what the world experienced in the 1970s, when the global economy also grappled with supply shocks, rising commodity prices, and policy missteps. It would be grim for everyone involved. Companies would have to juggle rising costs with weakening demand. Investors would struggle to eke out returns in an environment where both bonds and equities were vulnerable. And households would have less purchasing power and job security.
The whole world might then tip into a recession, scarring a generation that already has less financial and human resilience. Future generations, already due to inherit a world of high debt, inequality, and climate crises, would suffer as well.
Right now, both the good and the bad scenarios are plausible, as are many points on the range bookended by them.
In fact, at the beginning of 2025, various market price indicators suggested that there was a roughly 80 percent chance of change for the better and a 20 percent chance of change for the worse. The outlook for the good scenario fell to below 50 percent in early April, as Trump announced much higher tariffs than markets had anticipated. It became more favorable by the end of the month, as traders and investors grew more confident that his subsequent 90-day delay would result in manageable tariffs and no major shock to the global trading system.
But this mix is inherently fluid and is likely to keep shifting, at least for the near future.
As much as they would like to, there are very few, if any, public or private actors that can fully protect themselves from the ongoing economic volatility. But there are strategies they can take to steer themselves through.
One approach is to simply stay the course and bet that, when all is said and done, the world will not look tremendously different than it did in January. The markets, after all, have already recovered from Trump’s sweeping trade pronouncements, with the major stock indices establishing new record highs. As the president talks and negotiates with different countries, de-escalation might prevail.
And no matter what happens, the United States will end up retaining its private-sector dynamism, innovation, and entrepreneurial spirit. It will lead the world in tech and biological development. Some economists go as far as to argue that an unsteady and volatile U.S. Treasury market need not contaminate a strong corporate sector. To them, one can be a good house in a volatile neighborhood.
Other countries, meanwhile, might fix their own economic troubles, forced to do so by the withdrawal of the U.S. security blanket. Europe could spur more growth by rationalizing its complex regulatory system, encouraging innovation and diffusion, and thus promoting productivity. This would be supported by better regionwide efforts to complete the EU’s architecture, which relies too heavily on its monetary union and desperately needs progress on its fiscal and banking unions.
Meanwhile, in Asia, Beijing might limit its exports so that countries do not fret about Chinese products being dumped into their markets—much as Japan did a few decades ago with its voluntary export restraints. China could also fundamentally revamp its growth model, replacing the traditional engines of exports and state investment with the unleashing of private domestic consumption and private investment.
El-Erian does not address who will actually pay for the $100B+ import tariffs: exporters through reduced prices (margins), importers through reduced profits (margins) or American consumers through higher prices. Most likely a combination of all 3 but in unknown proportions. Will it be a one-off effect on profits and/or inflation?
Nobody really knows, and nobody currently really cares.
Well, some do care:
Ryanair Holdings Plc said that any tariff cost would be on Boeing Co. to bear, as the Irish budget airline demanded a return to a no-duties regime that that has governed the industry for close to half a century.
The discount specialist could go as far as not taking its remaining jets until things have settled down, Chief Financial Officer Neil Sorahan said on Monday in an interview after reporting earnings. Ryanair expects Boeing to deliver the B737-8200 planes, of which 29 are still outstanding, at an agreed fixed price, he added.
“If there are tariffs, it’ll be on Boeing account not Ryanair’s,” Sorahan said in a Bloomberg TV interview. “We remain hopeful that sense will prevail.”
Some airlines have warned that they won’t be prepared to absorb the cost of tariffs as part of US President Donald Trump’s trade war. Delta Air Lines Inc. has even been stripping new Pratt & Whitney engines off Airbus SE aircraft and shipped them back to the US to avoid import fees and to overcome a shortage of aircraft. Airbus, for its part, has also said it won’t carry the cost of any levies into the US. (…)
- “The biggest uncertainty is Donald Trump’s tariff war. Daimler Truck reported a 20 per cent decline in second-quarter sales in North America as logistics companies held off purchases due to the evolving nature of the US tariffs.” (FT)
A new era?
“The thing that immediately stands out is that sectors can get really big and stay big for some time, especially during technological innovation and industrialization cycles (e.g. the rise of transports, energy, and the modern day rise of tech).” (Callum Thomas)
Source: Weekly S&P500 ChartStorm – 17 Mar 2024 [@Marlin_Capital]
IN GOD (AND ONLY GOD) WE TRUST:
Institutions are not trusted. The public is increasingly skeptical of institutions, with new Gallup data this week confirming that the half-century trend of eroding trust persists.
People don’t trust mass media, but we trust the podcasters we listen to and Substackers we read. Digitally-proficient politicians who break the fourth wall & engage citizens directly — Trump, AOC, Mamdani — are seen as more authentic, building devoted followers who trust them. For businesses or political leaders the answer is the same: you need to show up and tell your own story, personally, authentically & viscerally. All trust is local. (Bruce Mehlman)
The military???
Also via John Mauldin:
The two maps below show GDP per capita in South America in 1980 and 2023. The color scheme highlights how each country’s economy grew in this period – or in one case, how it didn’t.
Guyana had the most striking progress with per capita GDP going from $2,400 to $61,000. Chile, Colombia and Argentina also had major economic gains. Venezuela, on the other hand, went nowhere in this period. Any guesses why?
China has been very active in South America in the last 10 years…
EPA eliminates its scientific research arm The Office of Research and Development conducted research into hazardous chemicals, with studies that often underpinned stricter regulations.
The Environmental Protection Agency said on Friday it was dismantling its scientific research branch, expanding the Trump administration’s efforts to shrink the agency.
The move to eliminate the Office of Research and Development, which will prompt the exodus of hundreds of chemists and scientists assigned to conduct independent research on a range of environmental hazards, is part of a push to cut 23 percent of the agency’s staff. Its work, which often underpinned stricter federal regulations, was criticized by chemical manufacturers and other industries. (…)
Some import prices: last 3m a.r., June YoY (%)