Stocks Rally on US-China Preliminary Trade Agreement

US equities surged today, primarily fueled by a tentative US-China trade agreement that averted new tariffs and included commitments on rare earth metals and agricultural purchases, boosting economic optimism. This positive sentiment is reinforced by market expectations of a 25 basis point Fed rate cut this week and robust Q3 earnings beats from 84% of S&P 500 companies, despite a projected slowdown in overall profit growth. However, new US tariffs on Canadian imports and the ongoing government shutdown introduce countervailing pressures, as investors also anticipate major tech earnings and the announcement of the next Fed Chair.

Analysis

US equities rallied significantly today, driven primarily by a tentative US-China trade agreement that averted impending 100% tariffs and included China's commitment to purchase substantial US soybeans and not restrict rare earth exports for one year. This positive development propelled the S&P 500 up +0.87% and the Nasdaq 100 up +1.32%, with T-note prices declining as economic optimism increased.

The market also anticipates a -25 basis point federal funds rate cut from the FOMC this week, with a 97% probability, supported by September's slightly weaker-than-expected CPI at +3.0% year-over-year. Q3 earnings season shows 84% of S&P 500 companies beating forecasts, marking the best quarter since 2021, though overall profit growth is projected to slow to +7.2% year-over-year and sales growth to +5.9% year-over-year.

However, new trade tensions with Canada, evidenced by a 10% tariff imposition, and the ongoing fifth-week US government shutdown introduce significant headwinds. The shutdown is delaying critical economic data and is estimated to furlough 640,000 federal workers, potentially increasing the unemployment rate to 4.7%. Additionally, the upcoming announcement of a new Fed Chair by year-end, with President Trump potentially seeking a more dovish appointee, adds monetary policy uncertainty.

Key Decisions for Investors

• Monitor the finalization of the US-China trade agreement for sustained market momentum, while closely tracking the escalation of US-Canada trade tensions and potential Supreme Court rulings on tariff legality.
• Evaluate individual company earnings quality and forward guidance, especially for the Magnificent Seven, given the strong beat rate but projected slowdown in aggregate profit and sales growth.
• Factor in the high probability of a 25 basis point Fed rate cut this week and potential future dovish shifts under a new Fed Chair, which could influence interest rate-sensitive sectors.
• Assess the economic impact of the prolonged government shutdown, particularly its effect on consumer spending and labor market data, and consider its potential to support T-notes.