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07.05.2025 09:56 AM
Markets Will Not Be Dictated To
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The market's eyes have finally opened. Donald Trump is not the kind of president who would lower tariffs in response to reciprocal reductions from other countries. The occupant of the White House intends to dictate the terms of negotiations. Either meet his demands or leave the American market. The S&P 500 has realized that the U.S. president can change his approach at any moment, and negotiations are taking place under the threat of force. What are the odds of success under such conditions? The decline of the broad stock index for a second consecutive trading session reflects significant doubt.

Goldman Sachs believes current valuations of U.S. equities leave little room for an extended S&P 500 rally. JP Morgan argues that U.S.-issued assets are not a safe haven amid market shocks. HSBC urges caution, citing dire fundamental conditions. Despite the longest winning streak since 2024, the broad stock index is still underperforming its European counterparts. However, the political crisis in Germany could shift the balance of power.

S&P 500 vs. European Stock Index Performance

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Friedrich Merz became a star in the financial markets by proposing an adjustment to Germany's debt brake rule. But as the saying goes, there's a thin line between greatness and ridicule. He failed to gain Bundestag approval for the chancellorship despite having sufficient coalition support on paper. Et tu, Brute? Someone from within his own Christian Democratic Union betrayed him. So far, this hasn't rattled the DAX 40 much, but if new parliamentary elections are called, things could quickly spiral out of control.

Capital outflows from the U.S. to Europe, driven by the loss of American exceptionalism, have been one of the reasons behind the S&P 500's slide toward its April lows. Should capital reverse course and return to the U.S., the broad index could pleasantly surprise its supporters.

Still, a slowing global economy and looming U.S. recession are not ideal for buying stocks. Trump attempts to overhaul the international trade system, but such a transformation requires financing. According to the IMF, banks provide trade financing worth $10 trillion. Disruptions in supply chains could reduce lending volumes and tighten financial conditions. Can the U.S. and other countries withstand that? I doubt it.

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The president's determination to dictate terms—negotiating with a proverbial gun to the other party's head—frightens the S&P 500 more than the potential political crisis in Germany or the upcoming U.S.-China trade talks set to begin in Switzerland. And let's not forget the Federal Reserve, which, despite Trump's pressure, plans to keep the federal funds rate unchanged at least until July. That's bad news for the stock market.

The S&P 500 is pulling back toward its moving averages on the daily chart. A bounce near the pivot level at 5510 may prompt traders to reassess short positions opened from 5695. Until then, holding those positions remains the advisable course.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
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