U.S.-China Trade War Heats Up: How American Investors Can Handle Market Risks and Economic Shocks

Amid the escalating US-China trade war and the turmoil in global supply chains, the US stock market has demonstrated resilience. Despite the first quarter GDP contraction, the S&P 500 index has only decreased by 2.4% since the announcement of tariffs. Investors underestimated the impact of the trade war and adjusted their asset allocation strategies to favor defensive assets. The dollar index declined, and international funds flowed to Europe and emerging markets. Companies are reorganizing supply chains to address risks. Small-cap stocks are facing both challenges and opportunities, consumer confidence is waning, and corporate investment remains hesitant.

Investor Composure and Market Rebound

Since early April 2025, following U.S. President Trump's announcement of large-scale tariff measures, the market experienced a brief shock but quickly stabilized. Although the S&P 500 index remains about 10% below its February peak, it has not seen the expected sharp decline. According to The Economist, analysts still expect annual corporate earnings growth to reach 12%, indicating that the market has not reflected the risks of an economic recession or trade disaster.

This "buying on the dip" behavior mainly comes from U.S. retail investors, whose confidence in Trump's policies seems to extend to stock market operations. Barclays points out that despite a "buyer strike" from foreign investors on U.S. assets, domestic investors remain actively involved, supporting the stock market's performance.

Shift in Asset Allocation: Defense and Diversification as Mainstays

In an environment of heightened uncertainty, investors are reassessing asset allocation strategies. According to AInvest, investors tend to reduce exposure to export-oriented industries (such as industrials and semiconductors) and instead favor defensive stocks, such as utility stocks (like NextEra Energy) and healthcare stocks (like Johnson & Johnson).

Additionally, inflation-hedging investments are also favored. If tariffs lead to price increases, energy and raw material stocks (such as copper and oil) may benefit. Gold and other tangible assets are also seen as hedging tools, especially with the expectation that the Federal Reserve may cut interest rates.

Global Capital Flows and the Dollar's Shaken Status

The uncertainty of trade policies has also affected global capital allocation. AXA Investment Management notes that the dollar index fell nearly 12% within the first 100 days of Trump's second term, hitting a historic low. This reflects shaken confidence among international investors in U.S. assets, with some funds shifting to Europe and other emerging markets.

Meanwhile, U.S. Treasury bonds have become the preferred safe-haven investment. According to data from The Economic Times, the ICE U.S. Treasury Index's performance in the early days of Trump's second term was the second-best among all presidents, only behind the Clinton era, indicating that investors are seeking stable returns amid stock market and dollar volatility.

Corporate Actions: Supply Chain Realignment and Geographic Diversification Strategies

Companies are also rapidly adjusting strategies to cope with trade war risks. According to Global Trade Magazine, a large German industrial company approved a "China+3" strategy at its board meeting in Stuttgart, retaining its production line in China while establishing parallel capacities in Southeast Asia, Eastern Europe, and Latin America to diversify risks.

Similarly, the pharmaceutical and automotive industries are reevaluating supply chain dependencies. Pharmaceutical companies, which were heavily reliant on Chinese active pharmaceutical ingredients (APIs), are now actively seeking suppliers in India and Europe. Automakers are beginning to abandon the "just-in-time" production model, shifting to more flexible inventory management.

Small-Cap Stocks: Challenges and Opportunities

For small-cap stocks, changes in trade policy present both risks and opportunities. Ironwood Investment Management points out that while small businesses have lower international exposure, they also lack buffers against external shocks. Investors need to pay special attention to the geographic revenue concentration levels and supply chain flexibility of small-cap stocks.

Small businesses with local supply sources and the ability to quickly adjust their operating models may stand out during this policy shift. Particularly in the context of the U.S. government's push for manufacturing reshoring and infrastructure investment, companies with geographic advantages and policy alignment capabilities are more attractive.

Consumer Sentiment and Corporate Investment Hesitation

Despite relatively stable stock market performance, the real economy shows significant pressure. According to reports from AINVEST and the Federal Reserve's Beige Book, companies generally exhibit "high caution," delaying investment and hiring plans. Goldman Sachs economists point out that tariffs act like "tax increases," leading to tighter financial conditions and increased uncertainty.

Consumer sentiment is also declining. A survey by the University of Michigan shows that consumer expectations for the future economy have significantly worsened, reflecting concerns about inflation and the job market. These factors may further impact consumer spending, putting pressure on companies reliant on domestic demand.

Restructuring of International Trade and China's Response

In China, exporters are actively seeking alternative markets. BBC reports that toy exporters in Yiwu have shifted 20-30% of U.S. orders to South American and Middle Eastern markets. Chinese goods exported to the U.S. face tariffs as high as 245%, forcing companies to accelerate strategies for reducing American dependency.

Although China's economy benefits in the short term from an export surge, Goldman Sachs predicts its annual growth rate will only be 4.5%, below the official target. Factory activity in export hubs like Guangzhou has noticeably slowed, indicating that the trade war is accumulating pressure on China's real economy.

References

• Investors’ risky bet: they can shrug off the trade war
• Trump loses first round of trade war as US economy shrinks, China's grows
• Trade Tensions Tip Scales: How the U.S. GDP Dip Signals a Shifting Economic Landscape
• Here's How Tariffs Could Affect This Industry Giant. Should Investors Be Worried?
• US-China Trade War Update: What Businesses Need to Know
• Stocks stage comeback to end mostly higher as economy contracts, tariff unease continues
• Trump's Tariffs: A defiant China looks beyond American buyers
• April Op-ed - Persistent damage
• Trade War and Market Turmoil: Analyzing Trump’s first 100 days impact of second presidential term - Market uncertainty reigns
• Evaluating Small Caps During Trade Policy Shifts