Stock-market bulls look for earnings to trump trade-war fears
Intensifying trade-war fears have been intermittently playing havoc with global markets for more than six months, but haven’t been enough to keep a resilient stock market down. Now, with earnings season set to get under way in earnest, some investors are ready to turn their focus elsewhere.
“I think the trade worries are probably on the back burner short term, at least as we go through earnings season and may be until a bit later in the year,” said Kate Warne, investment strategist at Edward Jones, in a Tuesday interview.
Stocks rose for a fourth straight day on Wall Street Tuesday, with the S&P 500 SPX, +0.35% rising 0.3% to post its highest close since Feb. 1 while the Dow Jones Industrial Average DJIA, +0.58% advanced around 143 points, or 0.6%.
PepsiCo Inc. PEP, +4.76% jumped 4.8% after posting stronger-than-expected earnings, with results due to start flowing on Friday as a trio of giant banks—JPMorgan Chase & Co. JPM, -0.62% Citigroup Inc. C, -1.03% and Wells Fargo & Co. WFC, -0.26% report.
Earnings are expected to show growth of more than 20% year-over-year for the second quarter.
The win streak comes as the U.S. on Friday implemented tariffs on $34 billion of imports from China, with Beijing moving to retaliate. The Trump administration has threatened tariffs on more than $400 billion in Chinese goods, while Beijing has vowed to respond.
Meanwhile, economic data point to an economy picking up steam in the second quarter. And while global growth appeared to flag in the first quarter, the world economy has showed signs regaining its footing, analysts said.
Indeed, worries that an escalating trade dust-up, particularly between the U.S. and China, could dent global growth might explain much of the investor sensitivity to trade headlines. Warne argued that expectations for synchronous global growth—a phrase widely used in 2017—to continue at last year’s pace may have been overblown, with investors now adjusting to the reality of a continued, but less spectacular, expansion.
“I think ‘synchronized’ might be too strong a word at this stage but I think global growth might still be alive,” Warne said, noting evidence of improvement in Europe and Japan where monetary policy remains accommodative. Combined with lower valuations in developed markets outside the U.S., that offers opportunities for investors she said.
In the U.S., the backdrop, including the outside risk of a damaging trade war, favors small- and mid-capitalization stocks, Warne said, given their low dependence on revenues from abroad.
On the trade front, Warne said she continues to view the tit-for-tat dispute on trade largely as negotiating postures that, for the most part, are unlikely to be implemented. That said, she acknowledged that “like many others, we’ve been surprised by how many have actually gone into effect and haven’t been negotiated away.”
While the tariffs announced so far are unlikely to have a significant impact on the overall U.S. or global economy, the danger is that a cycle of tariffs and retaliatory tariffs turns into a spiral.
“We’re concerned because once tit-for-tat tariffs start, it’s hard to find a stopping point,” she said.
So when does a trade skirmish turn into a trade war? Warne described it as a situation in which “there seems to be no stopping point and the increased tariffs or other trade disruptions are actually beginning to hurt other countries and they can’t seem to bring themselves out of it.”
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