A cooling of the US-China trade war is an optimistic outlook for the stock market that few investors think about, says JPMorgan.

biden, xi meeting 2011

  • A cooling trade war between the US and China could have a major impact on the stock market, according to JPMorgan.
  • The stock market would rise, inflation would cool and supply chain bottlenecks would ease if Biden rolled back existing rates, the bank said.
  • “The possibility of easing tariffs between the US and China is a non-consensus tailwind for US and Chinese stocks,” JPMorgan said.

US stocks will have more upside potential if the US rolls back existing tariffs on China and lowers the temperature of the ongoing trade war, JP Morgan’s Marko Kolanovic said in a note on Monday.

While few have considered the potential for a reversal in the US-China trade war, the move could come before the 2022 US midterm elections as it would align with President Joe Biden’s campaign pledge, business concerns would and provide consumers with relief at a time of high inflation, according to the note.

Any policy reversal represents a “non-consensus tailwind for US and Chinese stocks”, such as: it would help keep inflation in check, alleviating supply chain pressure and boosting corporate profits, leading to a rise in share prices.

“A reversal of existing rates could mean immediate earnings per share of $5 for the… S&P 500 with up to an additional $5 of second-order securities,” Kolanovic said. The bank estimates that trade tariffs have cost consumers and businesses a cumulative $128 billion since they went into effect in 2018.

The first two phases of tariffs on Chinese goods, introduced by the Trump administration, cut earnings per share by 7% to 8% for S&P 500 companies due to first- and second-order effects. Tariffs of $350 billion to $370 billion are currently in effect.

“So, even a partial settlement would be a source of margin and revenue through lower friction costs, while also supporting the labor market recovery and helping to alleviate supply chain problems,” Kolanovic said.

Stock market sectors poised for the most upside potential when tariffs are withdrawn are the same sectors that were most affected when they were introduced, including industrial, materials, technology hardware and consumer discretionary, Kolanovic said.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *