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What happened?
The S&P 500 rallied 3.3% and the tech-heavy Nasdaq climbed 4.4% on Monday, driven by news that the US and China agreed to lower tariffs for 90 days while talks continue. The levy on most Chinese goods entering the US will be cut to 30% from 145%, while China will reduce the tax on US imports to 10% from 125%. Rare earth export permits for US customers may see smoother approvals following Monday's trade agreement, though full restrictions are unlikely to be lifted, according to Chinese industry sources reported by Reuters.

US Treasury Secretary Scott Bessent stated, “We are in agreement that neither side wants to decouple,” highlighting the creation of a mechanism for continued talks to prevent renewed trade tensions between the world's two largest economies. This followed weekend discussions in Switzerland, where US officials reported “significant progress.”

Meanwhile, US court challenges to the Trump administration’s tariffs starting this week could provide another path to lower import levies. Separately, momentum appears to be building for a ceasefire in the Russia/Ukraine war, as Ukraine's leader plans to meet with his Russian counterpart in Türkiye on Thursday. President Trump on Monday suggested he was considering “flying over” to join the talks, adding to momentum.

While optimism over trade talks lifted markets, pharmaceutical stocks came into focus on Monday after President Donald Trump pledged to implement what he calls “Most Favored Nation” (MFN) pricing for US prescription drugs, aligning domestic prices with the lowest available in other high-income countries. In a Truth Social post, Trump announced plans for a 59% price reduction. Shares of major pharmaceutical companies were mixed as investors grapple with the feasibility of this proposal.

In addition to the rise in US equities, the Euro Stoxx 50 increased 1.6%, the Hang Seng index gained 3%, and China's CSI 300 index rose 1.2%. Gold, previously supported by safe-haven demand amid trade uncertainty, declined 3.1% to USD 3,241 per ounce.

The US dollar index rose 1.4% on Monday, further highlighting a return of confidence in the US as a perceived safe haven, while the 10-year US Treasury yield rose 9bps, signaling a shift toward risk assets.

S&P 500 futures on Tuesday suggest the index may hold onto most of Monday's gains, with a decline of just 0.3% at the time of writing. European markets are holding steady, with Germany's Dax index and the Euro Stoxx 50 both close to flat. Asian markets were mixed: The Hang Seng fell 1.9%, while Japan's Nikkei 225 rose 1.4%. Gold has regained some ground, up 0.6% at the time of writing to USD 3,252 an ounce.

What do we think?
The latest announcement to pause imposed "reciprocal" tariffs on China by 90 days is in line with our base-case assumption that tariff rates would fall from the high announced levels. A growing docket of legal challenges and the steady erosion in presidential approval ratings are leading to gradual but substantial rollbacks in tariffs.

The upcoming court challenges to the Trump administration’s tariffs could accelerate this process, and the Court of International Trade’s hearing on 13 May regarding the unprecedented use of the International Emergency Economic Powers Act (IEEPA) of 1977 could play a pivotal role in determining the legality of the tariffs. While the outcome remains uncertain, these legal developments warrant close monitoring and could become a key force in lowering tariffs in the months ahead.

In our view, the net effect will be that the effective tariff rate on imports into the US settles closer to 15-20% by year-end, compared to roughly 25% currently, based on 2024 import volumes. This view is predicated on a maintained rollback in the tariffs on China (settling around 30-40%) and of "reciprocal" tariffs for the rest of the world (settling around 10-15% by year-end).

Should tariffs remain at the levels under the 90-day reprieve, we estimate that the impact on the US economy would be similar to a 2% VAT hike. It would hurt growth in the near term and push up prices, but should not trigger a full-blown recession.

Aside from progress on trade talks, market sentiment may also have been helped by intensifying diplomatic pressure from European leaders calling for a 30-day ceasefire between Russia and Ukraine, with direct talks between Presidents Putin and Zelenskyy planned in Türkiye on Thursday. While our base case assumes a ceasefire deal will be reached this year, we expect relatively weak security guarantees for Ukraine. Increased defense spending in Europe, coupled with fiscal stimulus from Germany’s new government, should support European equities, as highlighted in our “Six ways to invest in Europe” theme.

Monday’s drug pricing executive order (EO) likely represents some near-term relief for the pharmaceutical sector, which had faced mounting pressure from policy uncertainty over US drug pricing in recent weeks. Notably, the iShares Biotechnology ETF rose 4.7% on Monday. The EO did not introduce new pathways for most-favored-nation (MFN) drug pricing. While MFN pricing remains a risk, its impact appears limited by several factors: Legal challenges are likely (as a similar EO was previously struck down in court), and significant changes would require legislation—an unlikely prospect given current Congressional priorities. As a result, we see MFN pricing risk as manageable.

Additionally, while the Inflation Reduction Act (IRA) framework could incorporate MFN as a price target, we think any resulting discounts would likely be incremental. In the near term, sentiment may remain fragile, with further headlines on MFN pricing potentially weighing on sentiment and contributing to sector volatility until further clarity emerges.

How do we invest?
We downgraded US equities to Neutral from Attractive. We held an Attractive view on US equities based on the belief that too much trade-related fear was priced into the market. With the recent rally following the reduction in those fears (the S&P 500 has rallied 11% since 10 April), the index is now trading above the levels prevailing on 2 April when President Trump imposed “Liberation Day” tariffs. In our view, the risk-reward in equities is now more balanced.

While the 90-day cooling-off period has provided a reprieve, uncertainty is still high, and investors will soon likely begin to focus on whether this temporary fix can evolve into a lasting agreement. The constructive tone from both sides suggests a willingness to negotiate further, but challenges in forging a durable deal could lead to bouts of volatility.

As a result, we downgraded US equities to Neutral from Attractive, having taken advantage of the opportunity presented by what we considered to be excessive investor pessimism. It is important to note that this is not a bearish view, nor a call to sell equities, and we recommend that investors maintain a full strategic allocation to US stocks. Over a 12-month time horizon, we believe that equities will be higher than current levels.

We maintain our US sector preferences, with an Attractive rating on communications services, information technology, health care, and utilities. With respect to health care, we think the recent sell-off in pharma on concerns over tariffs and drug pricing is overdone at current valuations, particularly given the legal challenges that Trump’s intended actions will likely face. The rest of the health care sector is not affected by the drug pricing executive order, and tariff exposure is manageable, in our view.

The pace and scale of tariff reductions agreed in this initial round have exceeded market expectations going in. If these lower tariff levels are sustained or reduced further, we could see upside risk to our full-year MSCI China earnings growth forecast (currently +5.5%). We think high-beta sectors, particularly our preferred technology names, are likely to continue outperforming. Within Chinese equities, we continue to favor growth and tech stocks and suggest investors consider tilting exposure toward select internet and China EV leaders.

Looking beyond the 90-day pause, the durability of this rally will depend on two key factors: whether US-China negotiators can turn this into a lasting trade agreement, and how Beijing proceeds with anticipated stimulus now that external risks appear to be easing.

For more information on these global equity ideas and views, contact Ulrike Hoffmann-Burchardi ( ulrike.hoffmann-burchardi@ubs.com ), CIO Global Equities.

More broadly, for investors who were underinvested going into this year’s sell-off and/or are willing to take on near-term risk for likely long-term reward, we recommend:

• Phase into stocks. Phasing into the market can be an effective way to position for medium- and longer-term upside while managing timing risks and uncertainty over the coming months. Capital preservation strategies can be another way to manage near-term downside risks.
• Transformational Innovation Opportunities (TRIOs). We maintain strong conviction in the long-term potential of our TRIO themes, including Artificial intelligence, Power and resources, and Longevity. The latter theme is an opportunity for investors with a longer investment horizon looking to reap the rewards of advances in human health. If Trump succeeds in capping some prescription drug prices, this could have a short-term impact on some of the pharma stocks within this theme, but we believe the structural drivers remain intact as lifespans extend and the elderly population grows. Also, in this event, we think the Chinese pharma sector could stand to benefit from pressure on international producers to cut production and R&D costs.
• Seek sell-off opportunities. We believe recent volatility has created select attractive opportunities at a single-stock and individual-market level, with various companies with good longer-term prospects now trading at more attractive valuations than at prior highs. In the US, we highlight 20 US companies across a range of sectors that are higher quality, have solid business models, and offer, in our view, good longer-term value (see “Sell-off opportunities” – Global,” published on 17 April 2025). In Europe, our “Six ways to invest in Europe” list focuses on defensive stocks that we believe can benefit from increased market volatility, as well as from likely higher European defense spending and fiscal stimulus.
• Sell dollar rallies. On Monday, the dollar rallied, with EURUSD dropping by 1.4% to 1.11. With EURUSD having risen from 1.02 to as high as 1.14 this year, we expected a consolidation in the dollar’s value, and we anticipated that any trade deals were likely to be supportive. However, over the medium term, we anticipate renewed dollar weakness as the US economy slows and focus shifts to the US's large deficits. We prefer using periods of near-term dollar strength as an opportunity to reduce USD allocations in favor of currencies such as the yen, euro, pound, and Australian dollar.