Market Commentary

• Going in, we thought the probability of last weekend’s U.S./China trade talks yielding anything substantial was low.
• But lo and behold, there was a bit of a surprise in the outcome, and the initial market reaction was a strong positive for equities.

Last Thursday’s and Friday’s trading appeared to be dominated by market participants getting positioned for the much anticipated initial meeting in Geneva between trade negotiators for the United States and China that occurred over the weekend. Plenty of uncertainty surrounded the potential outcome, and a more risk-off mentality seemed a wise choice, in our view. We thought the outcome would be an agreement to have further discussions and the probability of anything substantial was low.

But lo and behold, there was a bit of a surprise in the outcome, and the initial market reaction was a strong positive for equities. So strong, in fact, that as of the time of this writing the S&P 500 Index is trading just 4.9% below the all-time record high set back in mid-February. Recall that in early April the index briefly touched the 20% pullback level from the intraday record high, hitting what some would call the threshold of a bear market. It’s been a quick bounce back over the past five weeks or so that’s been driven by a variety of factors including better-than-expected earnings and, particularly, guidance during the first-quarter reporting season as well as expectations that some trade deals would be announced (i.e., last week’s U.K. deal). It also has helped that much of the reported data covering April has so far continued to show U.S. economic resilience.

The weekend trade agreement details as we currently know them show a 90-day pause or cooling-off period where both sides have reduced their tariffs. Without getting too far down in the weeds, the U.S. took its 145% tariff rate down to 30% while China lowered its rate from 125% down to 10%. Dramatic reductions by just about any measure. The joint statement released in the wake of the meeting carried a positive tone and suggested further negotiations will have positive outcomes and that neither side was seeking a complete decoupling. Of course, as always, the devil is in the details and a deal has not officially been inked. A lot can happen between now and then.

So the U.S. is now in two temporary tariff suspensions: one on a large group of countries that expires on July 12 and now the one with China that begins on May 14. It appears that even with the announced deals with the U.K. and other countries as well as the initial give-and-take with China the level of tariffs will remain in the double-digits. And keep in mind that at the same time the U.S. economy is slowing down and we believe will likely not see a notable rebound until late this year and as we move into 2026.

The bottom line is that many uncertainties remain. The U.S. is in the early stages of trade negotiations. Given that, our guidance is to continue to lean toward higher-quality large- and mid-cap U.S. equities. In fixed income, we favor exposure to investment-grade corporates and essential-service municipal bonds in the three-to-seven-year maturity range.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

Investment Grade bonds - A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.