We're Sticking With This Position as China, Europe Dash Trade Optimism

While we all enjoyed the market’s bounce back on Wednesday, the move higher sagged as we moved into the afternoon and on Thursday morning it looks like the market will give even more of those gains back as folks digest sobering comments from China and the European Union over the prospect of trade talks.

The initial jump in stocks on Wednesday following comments by President Trump that China tariffs would drop “substantially,” pending talks with Beijing, but early on Thursday, China’s Ministry of Commerce Spokesperson He Yadong shared that, “At present, there are absolutely no negotiations on the economy and trade between China and the U.S…”

Comments from Pascal Donohoe, president of the Eurogroup and finance minister of Ireland, also tossed some cold water on U.S. trade talks with the European Union:

“I do believe an agreement can be reached, but at the same time, I do know we have lots of work that we have to do in order to get to that point…”

Our initial take on Trump’s potential rollback of China tariffs is that they would still be higher than they were a few months ago, leading them to remain a headwind to corporate earnings, granted, a potentially smaller one. With any hoped-for progress on trade talks poised to take time, quarterly earnings reports this morning from PepsiCo PEP, Merk MRK and others are building on revised guidance from Kimberly Clark KMB on Monday that showed the impact on tariffs on its business.

Kimberly Clark cut its 2025 profit guidance citing $300 million in new costs from tariffs, resulting from a charge tied to a recent licensing deal and $200 million in estimated additional costs for tariffs implemented to date. Merck lowered its full-year profit guidance, and PepsiCo shared that global trade developments will increase its supply chain costs. Helen of Troy HELE pulled its forward guidance sharing that, "Due to evolving global tariff policies and the related business and macroeconomic uncertainty” it is “not providing an outlook for fiscal 2026 at this time.”

As you know, we’ve been expecting this to happen. With the velocity of March quarter earnings building further on Thursday and again next week, we should brace for more comments like this and the impact on S&P 500 EPS expectations for the current quarter as well as those for 2025. We continue to think this will force a re-think in EPS growth expectations and the size of valuation metrics investors are willing to apply to that market barometer. This means we will continue to be owners of the Portfolio’s inverse ETF positions for now.

Upcoming Fed Speakers

We’ll also be listening to the next round of Fed speakers following the data contained in Wednesday's April Flash PMI and Beige Book reports. The preliminary PMI data showed a sharp pick up in prices due to, you guessed it, tariffs:

"Average prices charged for goods and services rose in April at the sharpest rate for 13 months, increasing especially steeply in manufacturing (where the rate of inflation hit a 29-month high) but also picking up further pace in services (where the rate of inflation struck a seven-month high).

"Higher charges were attributed to rising costs, linked widely in turn to tariffs, rising import prices, and increased labor costs."

Meanwhile, the Fed Beige Book found that businesses dealing with the early stages of President Donald Trump’s tariffs are looking for ways to pass increasing costs onto consumers.

What we see in those reports does not suggest upcoming Fed speakers will offer any softer language compared to Fed Chair Powell’s recent comments about the potential prospect for rate cuts absent a collapse in the economy. The two reports from Wednesday painted the picture of a slower-growing economy, but still a growing one.

Coming Up…

Coming up on Thursday morning, we’ll share our take on last night’s consensus-topping earnings reports from ServiceNow NOW that is prompting a fresh round of price target increases from the Wall Street community.

We’ll also share our thoughts on the latest earnings report from United Rentals URI, but for that, we’ll wait until we’ve digested the company’s earnings call slotted for Thursday morning.

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At the time of publication, TheStreet Pro Portfolio was long NOW and URI.