The Dow Jones and the rest of the U.S. stock market are expected to initiate strong rallies in the upcoming weeks as the confidence of investors in the prospect of a comprehensive deal between the U.S. and China grows.

On Friday, several sources including The Wall Street Journal reported that the Trump administration is set to extend the suspension on tariffs from March 1 to May 1, by 60 days.

The intent of the U.S. government to postpone the deadline of the trade deal demonstrates the willingness of both countries to achieve a full agreement in the upcoming months.

Reports on the prolongation of the trade talks follow a statement released by Chinese President Xi Jinping earlier this week when he claimed that the U.S. and China are “inseparable.”

Dow Jones Confidence Rising Rapidly

Since January 28, within less than a month, the Dow Jones Industrial Average recovered from 24,528 points to 26,031 points, smashing through the 26,000 level for the first time since November.

Several fundamental catalysts including the strong jobs growth in the U.S., record high household balance sheets, and the patience of the Federal Reserve are said to have fueled the rally of the Dow Jones.

Most importantly, however, geopolitical risks have noticeably reduced in recent weeks due to the significant progress the U.S. and China have made on the ongoing trade discussions.

The majority of issues highlighted during the meetings carried out by the U.S. and Chinese negotiators have reportedly been addressed through MOUs.

But, the root of the trade war, which is the U.S. government’s concern towards the industrial policies of China that determine the structure of the country’s economy, remains unsolved.

Michael Wessel, an advisor for the Trump trade team and a commissioner of a congressional panel on China, told WSJ that the Chinese government convinced the Trump administration to step back and work towards an achievable deal.

The advisor suggested that the Trump administration would also like to close a deal with China prior to the 2020 election.

He said:

It seems the Chinese have gotten the president to back down a bit. They are probably going to address the most egregious public issues that might come up prior to the 2020 election and manage the relationship until then. The Chinese don’t want to be an election issue either.

The positive sentiment in the prospect of a trade deal has been enough to reverse the trend of the Dow Jones and allow the U.S. market to initiate a stunning recovery.

If a comprehensive deal is achieved in the near-term, analysts foresee it leading the U.S. market into a strong bull market with solid momentum.

Major Hurdles Left to Overcome

As BlackRock global chief investment strategist Richard Turnill stated, the tension between the U.S. and China on the current industrial policies of China that pressure U.S. companies to share technologies with local companies could still intensify.

“The change in perception around the Fed is now largely priced in, and the recovery is also driven by a perceived improvement in U.S.-China trade tensions. But there are still significant risks of an escalation in tensions over technology,” Turnill said.

In the next several weeks, the U.S. and China are expected to focus the discussions on the protection of intellectual property and the nature of the partnerships between U.S. and Chinese companies pertaining to technological development and innovation.

But, analysts generally consider the potential extension of the March 1 deadline as a confident decision of the Trump administration expecting the trade war to come to an end in the short-term.