Goldman Sachs Report: U.S.-China Trade Tensions Expected to Escalate in 2025, U.S. Stocks Likely to Face Pressure, Non-U.S. Markets Expected to Perform Steadily

In 2025, global stock markets are turbulent due to geopolitical and policy uncertainties. A Goldman Sachs report indicates that US-China trade tensions and Trump's policies are putting pressure on US stocks, with the market worried about a recession. Federal Reserve Chair Powell is not in a hurry to cut interest rates, and the strong dollar is impacting capital flows. Stock markets outside the US are performing steadily due to favorable valuations and policy support, becoming a key focus for investors.

US-China Trade Tensions Heat Up, Impacting US Stock Performance

A Goldman Sachs report points out that the market held an optimistic view of US assets in early 2025. However, market sentiment took a sharp downturn after the Trump administration announced tariffs of up to 145% on Chinese goods on April 9, prompting China to retaliate with 125% tariffs. This escalation led to a significant pullback in US tech stocks, with the S&P 500 index experiencing a short-term drop of over 10%, causing a simultaneous decline in global risk assets.

According to Torsten Slok, chief economist at Apollo Global Management, about 7% of the annual revenue of S&P 500 companies, equivalent to $1.2 trillion, comes from China. If the US-China "decoupling" persists, it will significantly impact corporate profits. Goldman Sachs estimates that US tariff rates will rise by 16 percentage points, putting pressure on corporate costs and consumer prices.

Trump's Policies Spark Recession Expectations, Market Structure Changes

The uncertainty surrounding Trump's trade and fiscal policies has increased market volatility. Goldman Sachs notes that Trump's "Liberation Day" policy and pressure on the Federal Reserve to cut rates have raised concerns about the consistency of policies and economic outlook. Federal Reserve Chairman Powell stated in a press conference in early May that if high tariffs persist, it could lead to slower economic growth, rising inflation, and higher unemployment rates.

Despite Trump's calls for rate cuts, the Federal Reserve maintained the federal funds rate in the range of 4.25% to 4.5% and continued its $50 billion monthly quantitative tightening (QT) program. Powell emphasized that weak survey data alone is insufficient to prompt preventive rate cuts, and policy adjustments will be based on real economic data.

Strengthening of the Dollar Index, Changes in Capital Flows

Against the backdrop of the Federal Reserve's hawkish stance, the Dollar Index (DXY) rose by 0.4% in early May to 99.614, appreciating 1% against the yen to 143.84, breaking a three-day losing streak. The euro depreciated by 0.5% against the dollar to 1.1313. Goldman Sachs points out that the dollar's real value is now more than two standard deviations above its long-term average, and if history repeats, the dollar may face depreciation pressure of 25% to 30%.

Additionally, according to Goldman Sachs estimates, foreign investors have sold $63 billion worth of US stocks since March, with European investors being the main sellers. Nonetheless, US stocks have shown some resilience, indicating a decoupling between capital flows and market performance.

Non-US Stock Markets Outperform US Markets, Valuation and Policy Provide Support

Goldman Sachs reports that non-US stock markets performed relatively well in 2025, benefiting from lower valuations and improved policy environments. In Europe, Germany's shift to expansionary fiscal policy and a more than 400% rise in European defense stocks since the Russia-Ukraine war have driven overall market performance. In Asia, the competitiveness of China's tech industry and policy support have attracted capital inflows.

The report notes that while non-US markets are cheaper relative to the US, their valuations are not particularly low compared to their own history. If the global economy slows further, non-US markets may still face profit revision pressures. Goldman Sachs estimates that in a mild recession scenario, corporate profits could decline by about 10%.

Structural Risks Emerge in Global Stock Markets, Valuation and Concentration Raise Concerns

Goldman Sachs warns that structural risks are accumulating in global stock markets. The US market has long been dominated by tech giants, with high equity concentration, meaning that if tech stocks underperform, the overall market will face greater volatility. In early 2025, US tech stocks experienced a pullback due to competition from Chinese AI and overvaluation, dragging down the overall market.

Additionally, cyclical stocks have performed strongly in recent rebounds, but this is inconsistent with economic downside risks, indicating that the market may be underestimating potential risks. Goldman Sachs points out that if the S&P 500 index's price-to-earnings ratio falls to 18 times, stock prices could drop by 20% from current levels.

Investment Advice: Diversify Allocation, Pay Attention to Valuation Mean Reversion

Goldman Sachs advises investors to enhance the diversity of their asset allocation, rebalancing across regions, industries, and factors. The report highlights that traditional investment principles such as diversification and valuation mean reversion are even more important in the current environment of high valuations and policy uncertainty.

While the long-term performance of the US stock market may not be too poor, the return gap with other markets may narrow. Goldman Sachs emphasizes that investors should pay attention to changes in hard data and policy trends, avoiding over-reliance on short-term rebound signals.

Goldman Sachs Report: U.S.-China Trade Tensions Expected to Escalate in 2025, U.S. Stocks Likely to Face Pressure, Non-U.S. Markets Expected to Perform Steadily

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