The Tariff Tangle With China and What It Means for Earnings

Durkin: I am thrilled to be back. I gotta say filling in for you once upon a time was no easy task. I'd say the same for the great Chris Versace, but great to be with you Lindsey.

And you know, I think like most other journalists down here on the floor, all of us in the financial space, sleep is in short supply these days. But all the more exciting for a great conversation and try and help listeners make sense of the wild couple weeks that has been in the markets.

[00:00:52] Lindsey Bell: And that is not a green screen folks.

J.D. is actually on the floor of the New York Stock Exchange. So how cool is that? Today, J.D., you're right, none of us have been sleeping all that much because the, you know, the clock never stocks when it comes to tariffs, right? And that's what we're gonna kick off the show with. Talking about the latest with tariffs.

We'll get into earning season because that kicked off last week with the banks. And then finally we'll close it up with, China-US relations. So we've got a lot to cover in a short amount of time. We'll take a quick break here and we'll get right into it after this break. 

welcome back everybody. J.D. like I said, let's just talk with about the hottest topic of the day, and that is tariffs. I don't know about you, but I feel like coming into this week, there definitely seems it feels like there's a shift in the tariff talk, right? We're not so hard line stance as we were on April 2nd. We're starting to see some concessions, or at least a willingness, would you say, from the Trump administration to negotiate. We got the 90 day pause on tariffs stuck at the 10% rate. We've heard a little bit early this week about a potential concession being made for the autos.

The tariffs on the tech sector has have been put on hold. What do you make of all this? Is this, has the worst been put behind us with regards to tariffs, you think?

[00:02:15] J.D. Durkin: I mean, I, Lindsey, at this point, I think especially with President Trump, it's just wait five minutes for the next post, for the next tweet for the next thing that's gonna roil markets.

Because just, I mean, its, excuse me, tariffs are very much like a, temporary tattoo. I saw them recently compared to, because you think they're there for a little bit and you know, just wait a few minutes, but. You know, this weekend's tariff announcement was really interesting, obviously. Yes. To your point, we finally got some answers.

You know, call it the art of the deal, call it the White House sort of recognizing what was going on with treasuries and the bond market and other maybe pressure points they weren't anticipating. But fascinating specifically to me that I'm following today is on the tech tariffs, because we had a suggestion over the weekend that the worst of those tariffs would at least be paused or sidelined for the time being.

We were really expecting this surge in companies like Apple and Nvidia. Apple stock is up as you and I are recording this conversation about 3.8%, But you know, to this point of just wait a few minutes. Then when you had Secretary Howard Lutnick on some of the Sunday shows saying, oh, by the way, those same companies will be subject to, as of yet to be named semiconductor tariffs.

So just when you think you're in the clear, you know, the White House might have other plans and it's a, full-time job to try and keep track of all of the tit for tat tariff back and forth. That was a mouthful.

[00:03:29] Lindsey Bell: That was a mouthful, but it's, you're so right too. You get some reprieve on one sector or one industry and then it gets walked back.

So there's still this like significant level of, or lack of clarity, I guess is what I should say. And so I think it's really making it difficult for countries and organizations to know how to discuss these issues with the Trump administration. It's hard for us as investors, right, to figure out where do we go from here.

Where are tariffs going? What does it mean for profitability and costs? And what does it mean for prices for the consumer? So it's kind of putting everybody in this wait and see mode. It's kind of, it's funny you bring up the bond vigilantes, you know, there was news over the weekend or last week that it was the bond vigilantes, we saw bond yields spike.

they're still pretty elevated earlier this week, but I will mention they're still below where we were earlier this year. We reached 4.8% on the 10 year. And so while the move in. In the bond market usually makes, you know, it's, more about the size of the move. Rather than the direction or, the level.

So the swift move from about three 4% up to 4.5% in a day. That was a lot. But coming back to today, you still see bond yields elevated. There's a lot of discussion out there. We heard Janet Yellen talk about the weakness that we've seen in the dollar over the last several sessions. And there's this concern about American exceptionalism being, you know, thrown out the door. It was the trade last year, and was the trade, especially coming into this year when President Trump took office. But instead of focusing on pro-growth policies, he's now focusing on these other policies. Is American exceptionalism as a trade, is it dead?

What do you think, J.D.? What are you hearing?

[00:05:19] J.D. Durkin: I mean, a lot of speculation. I mean, at least if you look at the overall trends of de dollarization, and I think the moves last week from the bonds started to send up some of those warning signs that maybe the traditional rotation into those safe havens, into those plays with the, as we know, we like to say about the, treasury and those dead instruments, that they have the full safe and credit backing of the United States government. That's why they have been so attractive to countries like Japan and China. But that has, you know, maybe the perception, at least in the short term has, that has begun to unwind a little bit. And I think, rightfully so, that has startled a lot of people on Wall Street over the course of the last week or so.

It's interesting, you know, now we're getting into earning season, Lindsey, which I know we'll talk about in just a bit. I remember back several earnings seasons ago, the metaverse was the number one thing everyone was talking about, and then we pivoted to AI, everyone listening into every earnings call for references to artificial intelligence.

I think that will still be front and center, but the new keyword to listen for is uncertainty. And we're gonna continue to hear that in earnings call after earnings call. We heard a fair bit of it from the big banks, but I think that level of uncertainty and not quite knowing the path ahead and not being surefooted for the investment world.

 That's here to stay, given just, not just the tariff rollout, but how that has been communicated and showing that you've got several people like a Lutnick or a Besson or several others who could speak and maybe somewhat not quite be on the same page as the President.

[00:06:47] Lindsey Bell: Yeah, there's, that's the thing.

There's this mixed messaging about what is the goal of tariffs going forward too. And I think Mohammad El-Erian, he's been talking a lot about the approach to tariffs being this like spaghetti bowl, approach. Meaning that it's it's different for every single country. It's different for companies.

We might, you talked about Apple, so specifically talking about smartphones, and so it's really getting aligned on what is the goal for tariffs. Is it really about fair trade and reducing and removing all tariffs, all or any tariffs and living with either a low or no tariff environment? Is it revenue?

Is it really to re shore manufacturing here into the US? So I think that's what's gonna make it a little bit more difficult. And I think from Mohammed's perspective, executing the spaghetti bowl when there's different stipulations for every country and every company, is gonna be really difficult.

There's only so many folks in the administration. When you have to negotiate with 70 plus countries, right? That's gonna take time and each country's different. And, you know, if all of your lieutenants aren't on the same page, Lord knows what ends up being the outcome, right? And so that is, I think, a real risk.

And I think it's why you're finding that companies and people and countries are so paralyzed at this point in time.

[00:08:07] J.D. Durkin: Yeah, and you had that announcement from the president last week, which led to this historic intraday, just one day relief rally, 9.5%. We don't get those very often. But we can't forget what was really at the core of what's now, arguably one of the most infamous posts in the history of truth social, right?

It's, yes, we have a 90 day pause, which on the one hand indicates, the president still now has basically three months to strike a hundred plus trade deals. And even if he can do that. In the very same post, Lindsey, he ratcheted up the attack against China. And I think trying to bring Beijing to heal is the ultimate goal, and it's probably gonna prove to be the most difficult one, difficult one.

And to the point of, tariffs and, more specifically, Apple. I was a, Trump White House reporter during Trump 1.0. And you might remember early on, Lindsey, there were all these different kind of business or advisory councils around Trump. And ultimately, due to various controversies, they all disbanded.

But the one CEO I watched really play the game arguably better than anyone else was Tim Cook. When Donald Trump, at times politically or socially was a bit of a pariah, Tim Cook still made regular trips to that White House. He still maintained a close relationship with the people around President Trump, even members of his family.

Dan Ives at Wedbush Securities liked to say Tim Cook is 90% CEO, 10% politician. So even before the recent somewhat exemption announcement from just a few, a few days ago, I always suspected that Tim Cook would manage to position Apple in a way to avoid the worst of the back and forth. But as we said, there are still as of yet to be fully fleshed out semiconductor tariffs, which could put downward pressure on a company like that as well.

[00:09:42] Lindsey Bell: So let's just tie off this segment and this topic with where do you think that we're gonna be in 90 days from now? Where do you think tariffs will be? Where do you think the market will be? Do you have any pre, not to put you on the spot to make a prediction, but where do you think we're going?

[00:09:56] J.D. Durkin: Lindsey, I can't tell you where we're gonna be 90 minutes from now. If I'm gonna be very honest. I don't know that any of us could. I think in the long run, I think my, my, my expectation has been that the markets will learn to expect the unexpected. I think the markets that really got caught off guard last week from the president will learn to bake in that instability.

As we get closer to the 90 day mark. We can't forget the priorities that are front and center for this White House, that I think Wall Street had been most expecting, things like deregulation. Things like extending the 2017 Trump tax cuts. Maybe, crossing the finish line with more tax cuts. Easing the permitting process.

We haven't really gotten to that part of policy just yet. So the pain is upfront and I know there are a few bullish voices here on Wall Street who say, well just wait. Once we get through the pain, then the Trump administration could start to embrace the really good stuff that Wall Street wants. Maybe that comes into a picture a bit more, down the line.

But, I learned a long time ago not to try and predict anything that goes on with these markets or certainly with this President.

[00:10:53] Lindsey Bell: Yeah. No, and I think too, if you wanna make a parallel to it, you could look at the pandemic driven times, right? There was so much uncertainty. And at that point in time, the word unprecedented was being used in earnings calls and all over the media, right?

It wasn't uncertainty, it was unprecedented change. And you could probably argue we're going through unprecedented change, but there's a lack of clarity and direction, same thing. And what I would say is the markets were uncomfortably volatile to the downside primarily, but, markets tend to get through these challenging periods of time over the long run.

So you have to live through it and see through the short-term volatility to become that successful long-term investor. But to your point, let's move into earnings, right? For a company, this is not comfortable, right? You are literally like, stymied from making any important decisions. We heard on Goldman's earnings call at the top of this week that, their CEO said, uncertainty has made it difficult for corporate client CEOs and, it's made, they've made it difficult for corporate client CEOs, to make important decisions about investments and hiring and things like that moving forward too. So that has yet to be reflected in earnings expectations. The first quarter is probably gonna be a pretty decent one. Expectations for our first 7% earnings growth in Q1. That's down from 11% at the start of the year.

But, the tariff volatility really didn't occur until the end of the first quarter. And what you're starting to see is this trend for companies to just straight up pull guidance. Not lower guidance, pull it. Because they don't know where the economy is going. They don't know what tariffs mean for their businesses.

They don't know what it means for prices, for costs, and for profitability. And so ultimately, at the end of the day, if you're the CEO or CFO of a company, you don't really have an incentive to stick your neck out there, right, and guess where you're gonna be at the end of the year. Just like you said, you can't guess where we're gonna be in 90 days.

The CEO is like, I can't guess where we're gonna be in three quarters of the year from now. Because things could change. It could be near term pain for longer term gain. But overall, I think that is the real risk for the market because numbers have not come down much for 2025, and I think it's just analysts, Wall Street analysts and corporations don't know what to do with the numbers.

And so if you look at it from that perspective, the market's still trading at 20 times, by the way. Numbers have come down a little bit. We're looking for 8% growth for 2025. But on a 20 multiple. And there's a lot of folks out there saying that earnings growth should go to zero for the full year. I mean, I don't know what you're hearing.

I know we're looking at bank earnings just came out recently. And the important thing to watch with bank earnings, you know as well as I do is, really the consumer facing businesses. of course corporate business and loans and trading and things like that are important to the banks. But we heard from Jamie Diamond and we heard from Wells Fargo and it seems like they're not really ready to count the consumer out.

And it really hinges on the consumer having jobs is what, and that's what I always say. If somebody, if you're employed and you're making money, you're gonna probably continue to spend money. That's been the history, even though consumer sentiment has been in the tank. And now I just want to, you know, get your take on bank earnings or the consumer, whatever you're watching.

[00:14:20] J.D. Durkin: Yeah, of course. It's a great point, especially as we've talked so much about this kind of separation between the haves and the have nots since interest rates started going up a few years ago, where if you do have a job, and especially if you're a saver, you can allow those interest rates to really work for you, and that puts a further separation between the savers and the borrowers.

And if you were a borrower in a high interest rate environment, those pressure points are still there to your exact point about the importance of jobs and wages in that overall labor market data. Now, we can't forget one of the considerations for the central bank, we've heard Jerome Powell kind of dance around this from time to time, is yes, we are first and foremost data dependent on watching inflation come down to 2%.

But if we do have that unexpected deterioration in overall labor market conditions, that could also force our hand, as the Fed, to cut interest rates. So that's a whole lot of a dose of uncertainty I think underscores your point there about jobs. The first thing that's interesting for me about the, some of the bank earnings we've already heard was just how strong the first quarter was. And I think to the point you made a few moments ago there, Lindsey, which is a lot of this tariff uncertainty is not necessarily baked in to the earnings that we're going to get from this quarter, but it's what comes tomorrow.

That is the big uncertainty because for Goldman Sachs, they just said this was their highest ever quarter for equity trading. Some of the best quarters for Morgan Stanley and JPM as well. One of the things that I kind of look at are the personal politics of all of this. I was stunned, but also not surprised at the same time, if that makes sense, to watch Jamie Diamond last week go on with Maria Bartiromo, knowing full well that he had an audience, yes of the American people, but really he had an audience of one. This was Jamie Diamond speaking to the President of the United States through a channel of Fox Business to say basically, Mr. President, we are nearing a recession far closer than you realize if you don't start to take action. That was of course, the day that the Trump administration did somewhat reverse course later in the day leading to that relief rally. But we heard that again from David Solomon at Goldman Sachs. He said, on the call, this is just earlier this morning, we're hopeful that feedback from companies large and small, institutional investors, and ultimately consumers, will support an approach that will lead to greater economic certainty and long-term growth.

Here he is at Goldman directly warning of that increasing risk of uncertainty, and I think somewhat hopeful that he can get through to the president much like Jamie Diamond and say, Mr. President, with all due respect, corporate America is sending you some warning signs here. And American exceptionalism and what you say on the campaign trail, that's all well and good, but help us look under the hood and we're willing to show you what we actually see in our numbers.

[00:16:55] Lindsey Bell: Yeah, I know. And what's been interesting this time around in Trump 2.0, he was so, focused the first time around in Trump 1.0, on the stock market and the performance of the stock market. And clearly he does not care. This is a whole different focus for him. And he's really digging his heels in and doubling down on tariffs.

And clearly the issue really is with China. I know we're gonna talk about that, but the, but what we need to watch currently is the state of the consumer, like we talked about. And one thing that I found very interesting on the JP Morgan call, is they, you know, they pointed to the credit card charge off rate, which is the amount of money that they don't expect to get paid back on credit cards, to be 3.6% for the full year.

And that's what it was last year. So they didn't change that number at all. And this is just one example. And so an analyst asked Jamie Diamond, what's up with it? How could that be possible? You, yourself are calling for a more elevated chance of a recession, right? And so then the CFO took the mic from Jamie and was like, whoa, you know, let me just say that, you know, it's not, that number's not necessarily reflective of what we're gonna see through the end of the year.

And he made the point that even if unemployment ticks up super significantly, it won't flow through charge offs until a later point in time. But he had to pull Jamie Diamond back and just be like, we should have, probably not given that number. But, so it's just, it's these are people with the most information about the current state of the economy and potentially where the economy is going and they can even.

You know, they can't get a grip on it. So it's, we're really in this uncomfortable period. And I guess what I would just say too is I've been thinking a lot about it from, from the consumer perspective and from the corporate perspective. I think that this really does prevent companies from hiring.

I don't think we're gonna see the layoffs that you might expect, unless the economy gets really significantly worse from here. But I don't think we're gonna see the layoffs because companies have been experiencing worker shortages since, prevalently since 2021. They're also in this mode where they don't really know how AI is gonna impact their businesses and their worker, and their employee base.

So I think they're trying to figure all of this out. But at the same time, I don't think they're gonna hire more people and they certainly aren't gonna pay people more. So I think at this point in time that the labor market is still just completely frozen, but that might not be such a bad thing at this point in time.

[00:19:30] J.D. Durkin: So it's, it sounds wait and see for investors, wait and see for corporate America, even wait and see for the job market here, Lindsey, right? I mean, it's a lot of uncertainty. And I think one of those things that you had mentioned, those unrecoverable loans, those basically those charge offs here from the bank.

You know, we did see between recent data from the Philadelphia Fed and from JP Morgan that 30, 60, 90 day delinquencies, those missed payments, those are stacking up. The number of Americans who are only paying the bare minimum on those monthly credit card debt payments, that number is increasing. And outright credit card defaults are, to our point, those unrecoverable loans that a bank essentially has to charge off. That's now at a 13 year high. That's not the type of data necessarily, I would argue, that's really going to steal the headlines. Especially when equities are on these sorts of wild rides. But I would argue those are the little warning signs underneath the surface that different, federal reserve banks or the big banks themselves are kind of flashing us.

And I think it's, important for us to at least keep tabs and remember as we move forward with, these very anomalous times that we're in.

[00:20:34] Lindsey Bell: Yeah, I think that's right. And so that brings me to, let's bring, talk about the third topic, which is the big elephant in the room. It's China. I mean, you should just set it yourself.

What this whole trade policy, trade war is about is China and the US. And the reality of it is is a 145% tariff rate on China, 125% on us. That's unsustainable for both countries and we're talking about the two largest countries in the world. I think that the president is trying to show that he's willing to negotiate with China, but you know, under certain preconceived terms apparently.

And China just really doesn't, you know, they're not willing to play these games. They've made that clear, I think, over the weekend. But at the same time, they're not necessarily in the position to accept things as they currently are. They're not in the, they're not in the position to accept 145% tariff rate because they have an economy that is already facing challenging times.

You know, the GDP is slowing. They were forced to do significant stimulus late last year. Which it's questionable how well that is working to support the real estate market and the economy overall. And there's been reports more recently that they're considering doing more stimulus to address these tariffs.

We've seen them get more comfortable with weakening their currency to make their, their tariffs look or their exports look more attractive to foreign buyers. So I, you know, there's a lot of things that they can do, but that there, there's, risks to that type of strategy too. It could lead to capital outflows from other countries.

It could lead to, you know, President Trump shutting down all negotiations with the country. There's a lot at stake for China and the US. And I think one of the bigger concerns though is the holdings of, you know, China's holdings of US treasuries. There was like thoughts that potentially that was what was driving part of the, bond market volatility last week.

I don't know what you've been hearing about that on your end on the floor of the stock exchange and from the folks you talked to.

[00:22:43] J.D. Durkin: Yeah. first of all, I'm glad you mentioned 'cause I, don't know, this got a ton of press, that evidence of devaluing its own currency relative to ours in an effort to, you know, really if you talk about like the, just the pure fight of, just fiscal or monetary policy between the two economies, that's evidence of them digging in their heels, right? Not willing to come to the negotiating table. And then again, politically, I listened to what President Trump says. Have you had personal conversations with Xi Jinping?

Would you say that conversations are flowing? And we haven't gotten, a whole lot of information. I agree with you. There seems to be the idea, it's difficult to know for sure, that China is both quietly but deliberately selling US treasuries. And I point to the timing of something last week that was really interesting, which was Tuesday night, and that was the day that led into that big relief rally.

We really started to sense very late into Tuesday night as markets abroad opened up and we started to see yields in the dollar not go hand in hand, not perform in tandem. We saw the dollar fall while we saw those long-term treasury yields start to go up, and that was a big warning sign because traditionally they go, they, they tend to follow a similar pattern.

And it was in those overnight hours, right? Typically, those that align with the Asian markets. And those are dominated, as we know, largely by foreign central banks and sovereign wealth funds in other countries. Basically our, in other words, our markets here in the US were closed, but we were seeing that significant bond activity. So from everyone I spoke with, there was still just a lot of speculation that things like that are going on.

Of course, as we know, it's very difficult to pinpoint for certain, but overall, even if you take a step back, Lindsey, and you look at the fact that, you know, maybe some big tech companies or semi components may be exempt. 46 of the 50 items that we in the United States most rely on China for, those are still subject to tariffs and there are still a ton of publicly traded companies that have incredible revenue exposure to China.

So as that Beijing versus White House tit for tat tariff policy continues to play itself out, there's a lot of, a lot of companies, big and small, that are caught in those crosshairs. Even as we continue to follow what's going on with treasuries and other things, China might be quietly, but maybe deliberately doing to try and undercut financial markets here in the US.

[00:24:55] Lindsey Bell: Yeah. No, and I think that's a really important point. I think that, that for China though too, the other side of the trade is that while they may be willing to devalue their currency, they have been also, they've been lowering or reducing their amount of US treasury holdings since 2013.

And part of that is because the trade imbalance has shrunk between the US and China. It's still huge. But it has shrunk and it has specifically shrunk since the 2018-2019 tariffs that Trump put on. But that gets me to the point that that 2018-2019 tariff episode between the US and China, that took some time to play out.

That didn't happen over three months or six months. It literally took a year and a half to two years where tariffs were put on, put off, they switched different sectors. And then eventually they came to a trade agreement where China was expected to buy a certain amount of US goods. I don't think they actually ended up buying as much as they were supposed to.

But the tariff rates were reduced. The market volatility in 2018 was very high. The market ended up down that year, but 2019 it rebounded. And remember the market is again a forward looking mechanism. So it tends to sniff these things out and bottom before the situation itself is resolved and it, and is reflected in earnings.

So I think that kind of really ties the whole conversation together there. But there's definitely gonna be a lot to watch with regards to the China-US conversation, and that's gonna be a key driver though. We might get pops on certain days, like the auto retailers or the automakers are popping today, on the news that Trump might give them some relief, at least in the near term.

And we saw Apple, like we started at the top of the show. We saw Apple, pop initially, and then that kind of was deflated a little bit. So I think there's still more uncertainty to figure out from here. I mean, how are you thinking about it?

[00:26:52] J.D. Durkin: I'm saying despite all this, let's just hope and pray that coffee exports remain very cheap because clearly it is something that you and I are going to be heavily reliant on, as much caffeine as possible for the weeks and months ahead because it's gonna be a lot of conversations like this as everyone tries to see.

And I was stunned. I just, last week sitting there, I said, wait a minute. We've got three years and nine months left of this. Maybe things settle out a little bit, but I think that type of volatility is here to stay, at least for the short term.

[00:27:20] Lindsey Bell: Well there's some perspective of how long we've got to go. All right. Well let's take a, let's take a quick break here and we'll come back to wrap it all up. 

All right. Welcome back everybody. J.D. it was so great to have you on the show and bringing your perspective about so many important topics that are moving markets today. Is there anything that stood out to you that we talked about or any point that you wanted to make, that we hadn't been able to talk through today?

[00:27:48] J.D. Durkin: I think overall, Lindsey, from our, conversation, and thank you again so much for having me fill in for Chris this week. I think just really underscoring that uncertainty as we move forward from earning season. You know, it's become such a big. Bit of fanfare for the Wall Street crowd to look forward to Nvidia earnings, to look at the, you know, the companies with the huge market caps that are so heavily consolidated.

But if we're already seeing a bit of uncertainty early on in earnings season, I think even despite the fact that we may have strong, really strong first quarter results, that uncertainty is going to be the key theme as we move forward. One other little bit of trading technical note, if for whatever it's worth for people that follow the technicals, was earlier today, the S&P 500 for the first time in a few years crossing what's called the death cross territory. That's when your short term 50 day moving average fall below your long term 200 day moving average. Could be used as a bit of a bear market indication. The last time we had this, we go back to March of 2022, Lindsey, that entry to exit point was about 11 months. They can be long or like we had in March of 2020, that one only lasted four to five weeks. But that has officially happened in the technicals for the S&P 500 today.

And no one knows where it goes from here, but it's at least worth noting.

[00:28:59] Lindsey Bell: Yeah, no, I'm a fundamental analyst at heart. I've been, that's how I grew up. But I always appreciate the technicals. Because especially in periods like this, it kind of gives you something to at least grasp onto and gives you a little bit of direction.

And I think when you marry fundamentals with technicals, it can be a really fascinating discussion on whatever you're looking at it. From a specific company or sectors or the overall indices. So thanks for bringing that up. That was a really good point, strong point to end the show on, I think. Not necessarily the most positive point, but a strong point.

Thank you again, J.D., for joining us, on What Does It Mean? Chris will be back next week, and we will see you all then.