MW Why the stock rally may be in trouble after the White House 'backtracked' on tariffs

By Christine Idzelis

'We could even see a "sell-the-news" move once some trade deals are announced,' warns Sevens Report Research

The U.S. stock market has already priced in backtracking on the large and sweeping "liberation day" tariffs announced by President Donald Trump on April 2, making it difficult for the market to keep up its recent rally, according to Sevens Report Research.

"The Trump administration has seriously backtracked on the April 2 announcement, including a delay while negotiations take place and exempting major categories of imports," said Tom Essaye, founder and president of Sevens Report Research, in a note Monday. As an example of tariff exemptions, Essaye pointed to computer chips, electronics, pharmaceuticals and automobiles.

The S&P 500 SPX was trading modestly lower Monday afternoon at around 5,671, FactSet data show, at last check. That's after ending Friday with a ninth straight day of gains, which marked its longest winning streak since November 2004, according to Dow Jones Market Data.

"The reality of the past month post-'liberation day' hasn't been as bad as feared and the market has recouped those losses," said Essaye. "However, I do not think these events are enough to sustainably propel the S&P 500 forward and I am sticking to my general 5,100-5,500-ish range."

Investors, worried that large tariffs will place a drag on the U.S. economy while increasing the cost of goods for consumers, have been monitoring the White House's negotiations with its trading partners. But with backtracking on tariffs already priced into the market, Essaye cautioned that "we could even see a 'sell-the-news' move once some trade deals are announced."

The White House has paused the so-called reciprocal tariffs announced on April 2, as it works on negotiating trade deals with countries. As investors wait for deals, the stock market has recently responded positively to reports that trade tensions with China, the world's second-largest economy, may be softening.

Still, "tariffs will be substantially higher than they were on Jan. 2 and that is a headwind on growth," said Essaye. "And at this point, the market is susceptible to disappointing tariff news."

The S&P 500 closed Friday up 0.3% since April 2, according to Dow Jones Market Data. But the index, which is a measure of U.S. large-cap stocks with an outsize weighting toward Big Tech, remains in the red so far this year.

Based on Monday afternoon trading levels, the S&P 500 is down 3.6% in 2025, according to FactSet data, at last check. That's after April marked the index's third straight month of declines.

The U.S. stock market was mostly declining Monday afternoon, with the technology-heavy Nasdaq Composite COMP down modestly along with the S&P 500. The Dow Jones Industrial Average DJIA, a gauge of blue-chip stocks, was up slightly with a 0.2% gain, according to FactSet data, at last check.

"Hard economic data has been solid, but again, we haven't felt any of the real impact from tariffs and uncertainty yet," said Essaye. "Like earnings, the risk to growth is one direction: slower."

Read: Stock market's post-GDP whiplash shows it's 'foolish' to expect anything but volatility

Essaye said he continues to favor defensive sectors of the stock market, such as utilities, consumer staples and healthcare. He also cited a preference for broad diversification in U.S. equities, pointing to the Invesco S&P 500 Equal Weight ETF RSP - an exchange-traded fund that equally weights stocks in the S&P 500 - as an example of that investment approach.

His note shows that he also likes exchange-traded funds focused on minimizing volatility, such as the iShares MSCI USA Min Vol Factor ETF USMV, and has a preference for exposure to high-quality stocks through a fund like the iShares MSCI USA Quality Factor ETF QUAL.

"Obviously we've enjoyed the rally and it is true that the actual events of the past month were not as bad as feared in early April," said Essaye. "But not as bad as feared is not good, either, and I think the price action is implying the fundamentals are a bit better than they are in reality."

-Christine Idzelis

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May 05, 2025 13:24 ET (17:24 GMT)

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