Wolfe: Hard to be too negative on growth as Trump prioritizes real economy

Wolfe Research suggests a constructive outlook for growth and markets, contingent on President Trump's focus on the 'real economy,' as the U.S. and China negotiate trade terms in London. The firm anticipates a potential agreement where the U.S. may ease restrictions on technology exports in exchange for China easing rare earth export controls, which would prevent damage to the U.S. auto industry. Wolfe Research views this as a de-escalation of tensions, driven by Trump's prioritization of economic stability.

Analysis

Wolfe Research presents a moderately positive medium-term outlook for economic growth and financial markets, contingent upon President Trump's continued prioritization of the "real economy." This assessment is contextualized by the second day of U.S.-China trade negotiations in London, focused on mitigating tensions over U.S. technology curbs and China's rare earth export controls. Despite the lack of a formal rare earths agreement in Geneva last month, Wolfe Research observes "positive signals out of China," specifically the "issuance of temporary permits to suppliers of U.S. automakers," leading them to believe an agreement in London is likely. This anticipated deal would likely see the U.S. "scale back recently-introduced measures targeting chip design software, jet engine parts, chemicals and nuclear materials" in exchange for China easing restrictions on rare earth exports, which are critical given China accounts for "roughly 90% of global rare earth production." Beijing had previously added seven rare earths, vital for items like fighter jets, memory chips, and smartphones, to its export control list following U.S. tariff increases. Wolfe Research views a potential London agreement not as "material progress" but as a "dialing back of the rising tensions over the last month," which is significant as it is expected to prevent "material damage to the U.S., notably to the autos industry." This pragmatic approach to de-escalation reinforces Wolfe's view that it is "hard to be too negative on growth and markets over the medium term."

Key Decisions for Investors

• Investors may find the current environment conducive to maintaining or cautiously increasing exposure to growth-sensitive assets, particularly if the U.S.-China trade negotiations result in the anticipated de-escalation.
• Monitor the outcomes of the London negotiations closely, as an agreement easing restrictions on rare earths and U.S. technology inputs could provide a near-term catalyst for sectors such as automotive and semiconductors.
• Recognize that while a potential agreement signals a reduction in immediate trade friction, it is characterized as tension management rather than a fundamental resolution, suggesting that underlying geopolitical risks in U.S.-China relations persist and warrant ongoing strategic consideration.