By Teresa Rivas

Wall Street is rejoicing to start the week, yet investors looking for the S&P 500 to recover levels from just three months ago will need patience.

Stocks are soaring after weekend talks in Switzerland ended with the U.S. and China agreeing to reduce their so-called reciprocal tariffs by 115 percentage points for 90 days. President Donald Trump touted the move as a win for the U.S., although China was quick to claim victory, too.

That enormous reduction is definitely good news. China was the main target of Trump's April 2 tariffs, so any reduction in tension over trade, or progress toward a deal, diminishes the likelihood that the worst-case scenario -- a rapid delinking of the countries' economies, with an economic slowdown and increased inflation -- will play out.

Still, nothing has returned to normal. The U.S. is still moving forward on sectoral tariffs in areas such as semiconductors and pharmaceuticals. Reciprocal tariffs on Chinese goods of 10%, plus a 20% levy related to fentanyl, sound great compared with the 80% the president had previously suggested, but the levies are still higher than they were at the start of the year.

That goes some way to explain why, even with the Dow Jones Industrial Average surging 1000 points at the open and the Nasdaq Composite poised to enter a new bull market, investors are still nursing year-to- date losses. The S&P 500 and the Nasdaq are still down about 5% and 7%, respectively, since their 2025 highs, hit Feb. 19.

Nonetheless, with hopes running high that tariffs will remain in manageable territory, the market seems poised to keep rising. UBS strategist Andrew Garthwaite believes that markets look increasingly likely to price in a blue-sky scenario, for a number of reasons, even if the good times don't last.

The first is the administration's "significant climbdown on tariffs," he wrote on Friday. "It's becoming clear that President Trump perhaps has less leverage than he initially thought."

With Trump's approval ratings down and the stock market still recovering from the damage his tariffs inflicted, Garthwaite believes that Trump could feel compelled to declare victory. That could mean citing the 17 countries that have offered to reduce trade barriers and the $1.9 trillion of investments in the U.S. that domestic and foreign companies have promised -- and moving on.

Then there is the idea that lower wage growth, plus a reduced risk of inflation as a result of this weekend's news, "potentially allows the Federal Reserve to cut [interest rates] proactively from midyear," Garthwaite wrote. "A proactive Fed potentially allows the market to look through any V-shaped fall in earnings per share."

In addition, he believes that the argument for American exceptionalism -- in investing terms, the idea that U.S. markets are the best place to be -- isn't dead as long as Silicon Valley keeps reaching milestones in the artificial intelligence race.

While there are reasons the market's momentum may falter, he said, investors may feel more inclined to make more optimistic bets. The S&P 500 could be fairly valued at 6164, surpassing its previous high of 6144, Garthwaite wrote.

Evercore ISI senior managing director Julian Emanuel agrees that AI will remain a pillar of the market, though he is less upbeat about rapid gains. He wrote on Sunday that his base case for "2025's evolving Bull Market is a 'Process' where new all-time highs will be part of 2026's story rather than a 'Moonshot' like 1998 where new all-time highs were seen less than three months after the 10/1998 Bear Market bottom."

His year-end target for the S&P 500 is 5600, compared with 5831 early Monday afternoon. That is because there are constraining factors. At 2.6%, inflation is still above the Fed's 2% target and could climb as even reduced tariffs take hold. Evercore estimates that corporations will be able to pass along about 50% of tariff costs to U.S. shoppers, enough inflationary pressure to keep the central bank from cutting rates.

Then add in the fact that his firm forecasts the U.S. economy will grow 0.9% in 2025 -- "not a recession, but not far off," he wrote. "And the biggest constraint could be the U.S. budget deficit, projected to increase despite DOGE."

Still, he believes that as the bull market does gain momentum over time, sectors like communication services, consumer discretionary, and tech are likely to be the leaders once again. That is where investors should look to buy when prices dip, he says.

22V Research's Dennis DeBusschere is in a similar camp. He wrote Monday that he was expecting a U.S.-China trade deal to include higher tariffs than those that were announced, meaning the 'short-term risk-on factor rally" he thought would happen now has even longer to play out. He is putting the quality stocks with sustainable dividends that looked attractive when the tariff uncertainty was at its worst on the back burner. Instead, he favors growth and momentum names.

"The Consumer services and Tech sectors don't face a macro constraint like the housing and durable goods sector faces," he said.

With Monday's stock gains, it's worth remembering a bull market doesn't have to be loved to be profitable. The picture may not be as bright as it was at the start of the year, but it is getting clearer.

That means it is just a matter of time before stocks retake their former highs.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 12, 2025 14:03 ET (18:03 GMT)

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