Now that a meeting between U.S. and Chinese officials is on the calendar for this weekend, the focus turns to whether discussions will result in enough of a de-escalation that it restarts trade between the two economies or if investors will need to wait for more meetings.

Investors are expecting the weekend meeting could result in tariffs being rolled back to as low as 40%.

The fact that there is a meeting and potential for thawing in a tit-for-tat that has essentially brought trade between the world’s two largest economies to a standstill is a good news for markets.

“What’s needed is confirmation that there isn’t a re-escalation,” says Nadia Lovell, senior equity strategist at UBS Global Wealth Management via email. “Investors already expect negotiations with China will be tough and take time—this is already priced in.”

The S&P 500 rose 0.4% to 5628.32 on Wednesday, reversing a two-day fizzling of a rally that started last week on hopes for a thawing in U.S.-China relations.

Geopolitical analysts see the scheduled talks for this weekend between Treasury Secretary Scott Bessent and Vice Premier He Lifeng on economic issues and U.S. Trade Representative Jamieson Greer and his Chinese trade counterparts as the working-level discussions needed to find an off ramp.

Investors may be getting their hopes up. Veda Partners’ Henrietta Treyz says investors are expecting the meeting could result in tariffs being rolled back to as low as 40%—which she describes as “insanity.” More likely, the talks could set the stage for a call between Chinese leader Xi Jinping and President Donald Trump that will produce such a pause.

Analysts familiar with the thinking in China note a wariness about any potential deals or talks between the two leaders given the White House’s back-and-forth comments about the state of negotiations. Meetings such as the one between Canadian Prime Minister Mark Carney and Trump on Tuesday—and Trump’s remark that there is nothing Canada could offer to lift the trade deals—only add to that concern that any negotiation done by anyone other than Trump might not hold—and even then there is the risk of continual renegotiation or pushing for sweeteners.

During a House hearing on Wednesday, Bessent said: “As President Trump has stated, he will have the final decision on any trade agreement.”

A couple of hours later, in response to a query about whether he would remove tariffs on China to get that nation’s officials to the table, Trump said, “No.”

This dynamic has kept investors and others skeptical of what will actually come from the weekend meetings in Geneva, much as there is uncertainty over whether any of the talks the administration has already been having with 17 of its 18 other big trading partners will produce actual trade deals. In an example of how challenging agreements can be, India and the United Kingdom finally struck a deal after three years of talks.

“These [negotiations] will be agreements in principle and we will paper them over in coming months,” Bessent said at the hearing in response to queries about what he expected would come from ongoing talks.  

Pressure has been building on the White House to temper its trade battle with China. Bessent himself has said the current situation is unsustainable. While the U.S. has paused a range of tariffs on other countries initially announced on April 2, tariffs on Chinese imports sit at 145%, and China has retaliated with a 125% levy on U.S. imports.

The tariffs have led to a sharp drop in cargo shipments and retailers warning of toy shortages for the holidays and empty shelves as they approach a key ordering deadline to stock their stores for the end of the year. That has likely lighted a fire under the administration to find a way to reduce tariffs to 50% to 60%.

“Even if this reduction isn’t immediate, the start of the dialogue likely signals that the lowering of tariffs isn’t far away,” write Beacon Policy Advisors analysts in a note to clients. “Having Bessent and Greer initiate this meeting signals that Trump, as we expected, is the one having to blink in the game of chicken he was playing with China over who would move to de-escalate the trade war.”

Overnight, Chinese officials noted they were starting talks at the request of U.S. officials. They also rolled out a spate of stimulus measures to help it manage the pain of the tariffs. Officials unveiled a new program to bolster stock market liquidity and ease regulations to help the battered private sector. The People’s Bank of China also cut its reserve requirement ratio by half a percentage point, the first time since last September, and said it would cut loan rates to help home buyers.

“If China’s economy can sustain growth in the face of the U.S. import tariffs, China’s bargaining power in any negotiations with the U.S. would be enhanced,” Macquarie analysts said in a client note on Wednesday, doubting that the negotiations would yield a “grand compromise.”

Geopolitical analysts note that a host of issues could be on the table for a de-escalation, including China allowing the U.S. to buy TikTok, fleshed-out proposals on how to curb the flow of fentanyl, and potential exemptions on tariffs. Such measures could enable both countries to roll back at least their recent retaliatory actions, which for China included restricting U.S. access to rare-earth materials and products, including magnets used in defense and autos.

Citi Chief Economist and former Treasury official Nathan Sheets told Barron’s his expectations are limited, with the talks likely more of an ice breaker. “The gap between the two countries is currently wide, and it’s likely to take more than a few hours of discussion to bring meaningful progress.”

Most investors are bracing for more longer-term friction as both economies move toward decoupling. Such a move will hit U.S. stocks. Even though China accounts for only 7% of S&P 500 revenue directly, U.S. companies made $1.2 trillion in revenue in the last 12 months selling to Chinese consumers, about quadruple the size of the trade deficit between the countries, according to Apollo Global Chief Economist Torsten Sløk.

“If the U.S. has to decouple completely from China, it would result in a significant decline in earnings for S&P 500 companies no longer selling products to Chinese consumers,” he wrote in a note to clients.

That’s some good perspective of the broader challenges ahead even if U.S. and China re-engagement offers markets some near-term calm.