Trump’s tariff pause takes away bad outcomes — but this UBS strategist says investors should still sell rallies.

Trump’s Tariff Pause Takes Away Bad Outcomes — But This UBS Strategist Says Investors Should Still Sell Rallies

Bhanu Baweja says the S&P 500 is at risk of slipping under 5,000

By Steven Orlowski, CFP, CNPR

In a move aimed at cooling rising trade tensions, former President Donald Trump has announced a temporary pause on the re-imposition of tariffs against China. Markets initially cheered the decision, viewing it as a reprieve from the kind of aggressive protectionist rhetoric that has roiled equities in the past. But one prominent strategist is urging caution, warning that the relief rally could be short-lived.

Bhanu Baweja, Chief Strategist at UBS, believes that while Trump’s tariff pause reduces the likelihood of a worst-case scenario, it does little to change the broader economic and market picture — which he sees as increasingly fragile. In fact, Baweja says this is precisely the kind of environment where investors should consider “selling into rallies,” rather than chasing short-term gains.

“The market is pricing in a Goldilocks outcome — no recession, slowing inflation, and steady earnings,” Baweja said in a recent client note. “That’s a lot of optimism priced into a market that’s already sitting at elevated valuations.”

The S&P 500 has defied expectations in recent months, climbing past 5,200 on the back of robust corporate earnings, enthusiasm around artificial intelligence, and hopes for Federal Reserve rate cuts later this year. But Baweja warns that the index could soon face gravity — and potentially slip below the psychologically significant 5,000 level — if macroeconomic headwinds intensify.

Why the Tariff Pause Isn’t a Game-Changer

Trump’s decision to pause tariff hikes may ease investor anxiety in the near term, but Baweja argues that it doesn’t address the more fundamental issues driving market risk — such as sticky inflation, tighter financial conditions, and fading consumer resilience.

“Tariffs were a tail-risk,” Baweja notes. “Removing them doesn’t create a bull case — it simply removes a bear catalyst. But we still have plenty of reasons to be cautious.”

Among those reasons is the potential for a slower-than-expected path to rate cuts from the Fed, which may be hesitant to ease policy in the face of persistent inflationary pressures. The central bank’s current wait-and-see approach has already pushed Treasury yields higher, making risk assets less attractive.

A Warning Against Complacency

Despite a strong first quarter, Baweja sees signs of complacency in equity markets — particularly among retail investors and tech-focused funds that have driven much of the recent momentum.

“Positioning is stretched, sentiment is euphoric, and volatility is low,” he says. “That’s not a good mix when earnings growth is moderating and credit conditions remain tight.”

UBS recommends that investors use market strength as an opportunity to trim exposure to overvalued segments, particularly within mega-cap tech. Baweja also suggests rotating into more defensive sectors, such as healthcare and consumer staples, which may hold up better if the economy slows.

Risk vs. Reward in a Late-Cycle Market

While Baweja stops short of predicting an outright bear market, he’s clear-eyed about the asymmetry in risk and reward at current levels. The upside, he says, is increasingly limited — while the downside could be sharper than many expect.

“The S&P 500 above 5,200 assumes a near-perfect environment,” he concludes. “That’s a hard ask in a world where geopolitical risks, inflation uncertainty, and tight monetary policy all remain firmly in play.”

Investors, he suggests, would be wise to temper their expectations — and resist the urge to chase rallies fueled by headline-driven optimism.

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Disclosure: This article is for informational purposes only and does not constitute investment advice. Always consult a licensed financial advisor before making investment decisions.