Sunday’s announcement that the US and China will sharply reduce tariffs and continue to negotiate sparked a monster rally in equities around the world. The assumption is that progress on trade talks reduces recession risk, here and abroad. US stocks, however, remain the odd man out vs. the rest of the major asset classes year to date, although American shares have recovered most of their recent losses.

Foreign stocks in developed markets ex-US are still the global performance leader by far in 2025, based on a set of ETFs through Monday’s close (May 12).

The Vanguard FTSE Developed Markets fund (NYSE: VEA ) is up 13.3% this year. US stocks ( VTI ) are down by a modest 0.5% in 2025.

The Global Market Index (GMI) is up 2.8% year to date. GMI is an unmanaged benchmark (maintained by CapitalSpectator.com) that holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive benchmark for multi-asset-class portfolios.

The rebound in optimism that the worst of global trade war will be averted was given a shot in the arm after the weekend’s news that the US and China are dialing down their tariffs. The caveat is that tariffs are still high by President Trump’s pre-“Liberation Day” announcement. The US’s effective tariff on China will be 39%, including levies in place before President Trump took office, according to Evercore ISI, based on reporting by The Wall Street Journal.

Another reason to remain cautious: the agreement between the US and China represents a pause rather than a final deal, and so there’s still uncertainty about how the process evolves.

Nonetheless, several analysts cut estimates for US recession odds after the announcement. Goldman Sachs, for instance, reduced its recession forecast to 35% from 45%, while Yardeni Research cut its recession odds to 25%.

Trade risk, however, remains highly fluid because it’s dependent on President Trump’s thinking du jour, which tends to be mercurial.

Perhaps why the progress on a trade deal doesn’t appear set to persuade the Fed to lower rates in the near term. Adriana Kugler, a member of the Fed’s board of governors, said the deal is an “improvement” but added that tariffs are “still pretty high”. She explained: “I still expect an increase in prices and a slowdown in the economy” but “not to the same extent as before.”

Fed funds futures are currently pricing in September as the earliest likely month for a cut.

Meanwhile, the rise in Treasury yields could be a headwind to a further recovery in US stocks. The 10-year Treasury yield on Monday rose to 4.48%, its highest level in a month. Until the bond market is convinced that tariff-related inflation risk has fallen in the near term, the potential for higher yields will resonate and provide a competitive alternative to stocks.

Let’s put it this way: It could be a long summer as the shape-shifting trade war unfolds. The only constant for the trade outlook is still change. Meantime, the markets have the unenviable task of trying to price in where all this is headed.