Vietnam Trade Deal Sparks New Tariff Questions

Hello everyone and welcome to market weekend review for the week ending July 4th, 2025. My name is Bashan Lynn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. On this week's edition of Market Week Review, we'll be discussing three major topics. First, we'll talk about the US trade deal that was reached between the US and Vietnam. What was the good news? What are some of the key watch points going forward? Second, we'll talk a little bit about the earnings preview for US S&P 500 companies in the second quarter. And finally, we will wrap up with a discussion of the economic outlook in non US markets. So, let's get started. First, in terms of the major development this week, one of the key items was the announcement of a trade deal between US and Vietnam. Now, you might remember that back in April, the US had agreed to pause some of the large reciprocal tariffs that it had imposed on other key trading partners, including Vietnam. Now, in terms of the new trade deal, this would see Vietnamese exports to the US be subject to a 20% tariff. And some products that were shipped via Vietnam but were produced in other countries might see a tariff that's a little bit higher at 40%. So let's talk about the implications. The good news from this trade deal is at least we got some degree of resolution of uncertainty. So now we know what tariff rate is going to be applied to products that are shipped to the US from Vietnam. The disappointing news though was that this tariff rate was higher than what some people on the street were looking for. So you'll remember that during the pause period, the US government was imposing a 10% baseline tariff on key trading partners. So this 20% final tariff rate is higher than that 10% initial baseline rate. The key watch point going forward will be whether some of the remaining trade deals as they get announced, whether those trade deals see tariffs that are closer to 10% or 20%. Ultimately, the magnitude of the tariff will have an impact on the magnitude of the potential slowdown to US economic growth that we see. The larger the final tariff rate, the more of an impact that you could see onto US final economic growth. Now, from our perspective at Russell Investments, our baseline continues to be that we expect the tariffs will ultimately settle at a more modest range and that the impact onto US economic growth will be more modest. We continue to think that the US most likely will be able to avoid a recession, but at the same time, we believe that the risks of an economic slowdown are still somewhat above average. Next, in terms of an earnings preview for S&P 500 companies, analysts are expecting that earnings growth might cool somewhat to about 5 to 6% year-over-year in the second quarter instead of the 14% pace of year-over-year earnings growth that we saw in the first quarter. Now, one of the things I would want to point out is that if you look at the trend in the past few quarters, what we've seen is that generally speaking, companies have been quite resilient in their profitability metrics and they've actually been able to beat those start of quarter initial estimates. So, it is possible that by the time we get through the end of the Q2 reporting season, that earnings growth for the S&P 500 turns out to be higher than 5%. Perhaps it might even get to the ballpark of say 8 to 10% by the end of a reporting season. So that's going to be something we're going to carefully monitor. In general, if earnings growth can stay stable and stay resilient, that's encouraging for the economy and should also help to support the US labor market as well. In terms of the key watch points in some of these earnings reports, we're going to look at what the companies say about the ongoing trade developments and how they plan to respond to it. to what degree will they increase prices or pass along the higher cost to consumers. We're also going to be carefully monitoring what these companies say about the lower income consumer because even though on balance the US consumer situation has been relatively robust despite all the elevated macroeconomic uncertainty, there is one key watch point which is that the lower income consumer is under more pressure. So, we're going to see what the companies say about changes in the consumption habits of lower income consumers. Finally, we'll wrap up with a discussion of the economic situation outside of the US. Two areas that I want to keep a close eye on. One is the United Kingdom, where on Wednesday, July 2nd, we saw a significant roughly 15 basis point increase in the 10-year yield on UK guilts, which are UK government bonds. Part of the reason for this increase in yields was because investors had some more questions about the fiscal situation in the U uh in the UK and some of the budget reforms that they're doing. Ultimately, we continue to believe that UK government bonds still offer some value, but we would want to see a higher valuation spread between where our estimate of the fair value is and where the current bond yield is before we take a tactical overweight position in UK guilts. And finally, in terms of next week, a key watch point will be the Canadian job creation data that comes out on July 11th. The unemployment rate in Canada has been res rising steadily, and so we'll need to continue to monitor that unemployment rate. Ultimately, we think the risks of an economic slowdown in Canada are higher in than in the US. And we do think that the Bank of Canada is very likely going to resume rate cuts very soon. That's all for this week. Happy 4th of July, and we'll see you next time on Market Weekend Review. Hi, I'm Sophie Anton, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.