Liberation Groundhog Day: Trade Tensions Return to Rattle Markets 

Published October 15, 2025 –  By Paul Beland, Global Head of Research – Wealth Management 

Global investors are experiencing a case of Liberation Day déjà vu. Just months after April’s “Liberation Day 1.0” appeared to mark a turning point in U.S.–China trade relations, global markets are once again unsettled by a sharp escalation in trade policy tensions.

On October 10, President Trump announced new 100% tariffs on Chinese imports, effective November 1, 2025, in direct response to Beijing’s expanded export controls on rare earth elements. The announcement reignited market volatility across global equity and fixed income markets, evoking parallels to the events of early April.

While short-term uncertainty has returned, CFRA maintains its base case that a U.S.–China agreement is likely by early 2026, covering trade, technology, and tariff issues, potentially with broader geopolitical implications.

Key Takeaways

• Trade friction revisited: Renewed tariff actions and Chinese export restrictions have destabilized global markets.
• De-escalation expected: CFRA’s Washington Analysis anticipates a trade deal by early 2026, as both nations have incentives to reach an accord.
• Volatility near-term: Equity markets may experience short-term turbulence, but longer-term fundamentals and technical indicators remain constructive.
• Valuations elevated: With equity risk premiums at a 20-year low and the S&P 500 trading 41% above historical averages, markets appear priced for perfection.
• Investment stance: CFRA recommends maintaining diversified exposure, with selective buying if markets test correction levels (5–10% downside risk).

Trade Tensions Escalate

The U.S.–China trade conflict has intensified sharply. Average U.S. tariffs on Chinese imports now stand at approximately 58%, more than double the rate seen prior to April’s Liberation Day. The new 100% tariff proposal marks the most significant increase in trade barriers in recent history.

China’s retaliatory measures, announced on October 9, expand export controls on 12 of 17 rare earth elements, as well as on processing equipment. Given that China controls more than 90% of global refined rare earth supply, these restrictions represent a critical pressure point for industries reliant on these materials.

The U.S. sectors most affected include semiconductors, automotive manufacturing, and aerospace & defense. CFRA maintains an overweight rating on the Information Technology sector, with NVIDIA Corporation (NVDA) and Advanced Micro Devices Inc. (AMD) remaining top picks within semiconductors. The aerospace & defense industry should continue to benefit from rising geopolitical tensions and increased emphasis on supply chain independence.

Tariffs and Inflation: Renewed Pressure

Rising tariffs have begun to feed through to higher consumer prices, adding upward pressure to inflation. Over the past year, core goods inflation has shifted from negative territory to roughly +1.5%, contributing around 30 basis points to overall inflation.

If trade tensions persist, these inflationary pressures could intensify. CFRA continues to view tariffs as short-term inflationary but expects a muted longer-term impact as protectionist policies weigh on demand in 2026 and beyond.

Market Volatility and Risk Complacency

Market conditions suggest investors may be underestimating risk. The equity risk premium—the excess return investors require over risk-free assets—has fallen to below 4%, its lowest level in two decades. Historically, such periods have preceded a repricing of risk and short-term equity pullbacks.

The next few weeks are likely to be volatile as markets react to trade headlines leading up to the Trump–Xi meeting scheduled in South Korea later this month. CFRA expects negotiation tactics and public posturing to generate short-term market turbulence. However, the firm remains constructive on the long-term bull market, now in its third year, supported by improving earnings fundamentals.

Valuations Remain Stretched

The S&P 500 Index currently trades at a forward P/E of 23.7x, representing a 41% premium to its long-term average since 2005. While large-cap stocks account for much of this premium, nine of eleven sectors now trade above their historical averages—suggesting a broad-based elevation in valuations.

The Information Technology sector is trading at a 63% premium to its long-term average, reflecting optimism around AI-driven growth. Meanwhile, the S&P 500 Equal Weight Index, at 18.2x forward earnings, trades at a more modest 9% premium.

While current valuations are supported by solid earnings expectations, they leave little room for policy or growth disappointments.

Earnings Growth Supports the Outlook

Corporate earnings fundamentals remain healthy despite the renewed trade headwinds. The post-April slowdown in global trade did not translate into a collapse in corporate profitability or consumer demand.

CFRA projects S&P 500 earnings per share (EPS) growth of 8.6% in 2025 and 13.6% in 2026, driven by robust performance in Information Technology (19.6%), Financials (7.1%), and Industrials (4.8%).

AI-driven capital investment continues to offset trade-related uncertainty, particularly in the technology sector. CFRA views stable earnings expectations as a key factor underpinning the market’s resilience despite elevated valuations and geopolitical risk.

Investment Implications

While the short-term outlook is clouded by policy uncertainty, CFRA believes markets will ultimately look through the current turbulence. Both the U.S. and China remain economically incentivized to reach a compromise, and the political calendar favors progress toward a deal by early 2026.

However, investors should expect elevated volatility and potential corrections in the interim, particularly given the narrow equity risk premium and historically high valuation multiples.

Conclusion

Markets are reliving a familiar cycle: escalating U.S.–China tensions, inflation worries, and valuation concerns. Yet, as with April’s Liberation Day episode, CFRA believes this latest flare-up will ultimately subside, giving way to renewed stability and growth.

With healthy earnings, stable consumer demand, and both nations motivated to de-escalate, the fundamental underpinnings of the bull market remain intact.

Still, the market’s biggest risk is complacency. With valuations stretched and risk premiums historically low, investors should stay alert—not alarmed—and ready to act if volatility creates opportunity.