Investors had been hoping to see signs that a new trade agreement between the U.S. and China was close at hand, and sources told CNBC last week that a deal was possible by Friday. Trade has been one of the biggest overhangs for the market, but the prospect of successful talks has helped fuel the S&P 500's 17% gain this year.
Stock futures were sharply lower Sunday night after the president said, in a tweet, he would raise tariffs on $200 billion in Chinese goods to 25% from 10% Friday. He said the trade deal continues "but too slowly, as they attempt to renegotiate. No!"
Chinese Vice Premier Liu He was expected to attend talks in Washington this week, but that trip could be canceled due to Trump's new threats, sources told CNBC.
While Trump's comments could be a negotiating tactic, analysts said if the talks did run into trouble, it would be bad news for the stock market.
"The global economy can't handle the fracturing of this deal," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "You had two supports for the market this year — the Fed and a China trade deal. The Fed said it would sit tight and not cut interest rates and if the trade deal is in doubt, that could be a problem."
Goldman Sachs economists Sunday said the odds of a successful deal are now lower but indicated they think the increase in tariffs will be narrowly avoided. They put odds of new tariffs at 40% if the Chinese delegation still visits Washington — but said a canceled visit would mean "an agreement in the coming week would then seem very unlikely" and increased levies would become the base case.
"President Trump's announcement suggests that US-China negotiations may have reached a sticking point," the Goldman economists note. "This represents a shift from optimistic statements from US officials over the last few weeks and suggests that the probability of a near-term agreement is at least slightly lower than it seemed to be recently."
Political strategist Greg Valliere said Trump's tweets are a tactic that could backfire. "I don't think the Chinese would like to get bullied," he said.
"There was a lot of speculation in the last couple of weeks that the deal could be modest. Maybe he's trying to amp up the stakes," said Valliere, chief U.S. policy strategist with AGF Investments.
Aside from trade headlines this week, investors are awaiting Friday's inflation data, important after Federal Reserve Chairman Jerome Powell's comment Wednesday that weak inflation is transitory, signaling the Fed does not now have to consider an interest rate cut.
That comment from the Fed chief sent markets reeling, since many investors have been positioning in both bonds and stocks for a pre-emptive interest rate cut from the Fed. So Friday's consumer price index will be key, even though unlike the inflation measure the Fed watches, CPI is expected to show inflation running slightly above the Fed's 2% target in April. The Fed's favored PCE deflator had core inflation at 1.6% in the first quarter.
To close out the past week, the April jobs report crushed Wall Street's expectations — adding a robust 263,000 new hires while the unemployment rate fell to 3.6%, the lowest level in a generation, the Labor Department said Friday. Wall Street had been expecting 190,000 hires and a 3.8% jobless rate.
Stocks bounced higher on the jobs report, with the S&P 500 ending 28 points higher at 2,945.
"The more robust the incoming data is, the more time the Fed has to sit and watch and evaluate whether inflation is rising this year in the manner that they think it is. If the labor market is good enough, it allows the Fed to be patient, and let this thing play out," said Michael Gapen, chief U.S. economist at Barclays. Gapen said if the data and inflation is instead weakening, the Fed would have to rethink its position later in the year.
Earnings will continue to be a factor in the week ahead, with about 50 S&P 500 companies reporting, including media names like Disney, News Corp and Viacom.
But trade negotiations will remain the top concern for markets.
Even if there is positive news and a deal is reached soon, analysts have said the reaction in the stock market may initially seem short-lived. "If the tariffs come off, you might get some readjustment to earnings expectations. So, you might have a nice couple of days, but I think it's three-quarters of the way priced in, maybe a little bit more," said Lori Calvasina, chief U.S. equities strategist at RBC.
She said some sectors have already benefited from the prospects of a deal. "The two I think are in focus are industrials and semis," she said. As for semiconductors, "there's been such a fierce rally in that space this year. Semis were sort of the pure play on the China fears and they rallied hard and fast. They're starting to see some profit-taking."
The VanEck Vectors Semiconductor ETF is up 33.4% year-to-date.
Calvasina said the better-than-expected performance in S&P 500 first quarter earnings shows there will not be the earnings recession expected just a month ago. She said companies focused a lot on cost cutting to maintain their margins. According to Refinitiv, the S&P 500 companies are now expected to see profit growth of about 0.7%, compared to expectations for a contraction of 2% back on April 1.
"I think the market very much deserves the rally we've had," she said. However, she sees limited upside and maintains a target of 2,950 on the S&P for year end. "We're getting to the part of the year where we're vulnerable to bad news. It doesn't mean today is the top, but when we think about where we're going to be at year end, it's a good reason not to raise the target. We feel like we can overshoot in in the short term."
"It's probably a good time to take money off the table. We've said that things could weigh on the market in the second half," she said last week.
Investors were also looking towards Omaha this past weekend as Berkshire Hathaway held its annual meeting. Investor Warren Buffett appears on Squawk Box Monday starting at 6 a.m. ET.
6:00 a.m. Chicago Fed President Charles Evans
9:30 a.m. Philadelphia Fed Patrick Harker
2:00 p.m. Senior loan officer survey
Earnings: A-B Inbev, Electronic Arts, TripAdvisor, Petrobras, Diamondback Energy, Mylan, SeaWorld, Allergan, Lyft, Ambev, Emerson, Regeneron, Cinemark, Plains All American, Papa John's, Sempra Energy, Match Group, Wingstop
10:00 a.m. JOLTs
3:00 p.m. Consumer credit
Earnings: Disney, Fox Corp, Madison Square Garden, Wendy's, Hostess Brands, Marathon Petroleum, Royal Ahold, Barrick Gold, Bunge, Acushnet, McKesson, Switch, IAC/Interactive, Honda Motor, Toyota Motors, Siemens
Earnings: News Corp, Booking Holdings, Keurig Dr. Pepper, Tapestry, Norwegian Crusie Line, Becton Dickinson, Duke Energy, CenterPoint, Canadian Natural Resources, Cardinal Health, ArcelorMittal, Azul, Hain Celestial, AMC Enertainment, TrueCar, Axa Equitable, Vale, Equifax, Zillow, Yelp
8:30 a.m. International trade
8:30 a.m. Jobless claims
8:30 a.m. PPI
10:00 a.m. Wholesale trade
10:45 a.m. Atlanta Fed President Raphael Bostic
1:15 a.m. Chicago Fed's Evans
8:30 a.m. CPI
9:00 a.m. Atlanta Fed's Bostic
10:00 a.m. New York Fed President John Williams
2:00 p.m. Federal budget