Trade war fears are crushing stocks, and sell-off could keep going if there is no deal by Friday – CNBC
Stocks plunged and bonds rose in a safety trade Tuesday, after the Trump administration set the clock ticking on a 12:01 a.m. ET Friday deadline for raising tariffs to 25% on $200 billion in Chinese goods. Trump administration officials said they still expect to meet with a Chinese trade delegation this week, but at a media briefing late Monday they said their Chinese counterparts reneged on some key areas of agreement in trade talks.
“It all depends on what happens Friday. Traders were not expecting this. The market is trying to discount it in case tariffs get reinstated,” said Scott Redler, partner with T3live.com. “This is a curve ball, unexpected scenario.”
With the threat of tariffs, analysts say many of Wall Street’s assumption for profits and growth would have to be tossed âsuggesting that stocks could be too richly priced near recent highs.
The forward price-to-earnings ratio on the S&P 500 was at 17 times earnings expectations. “That has to come down because growth has to come down…A good part of what went on in this market was predicated on a deal getting done in the first place. If that’s not the case, we have to start taking [earnings] estimates down,” said Art Hogan, National Securities chief market strategist.
Keith Parker, chief U.S. equities strategist at UBS, said the hit to S&P 500 earnings would be 2% or greater, if the 10% tariffs on $200 billion in Chinese goods are raised to 25%. Parker said earnings would be hit by 7% if there was a full blown trade war, while the S&P 500 could trade in a range of 600 points on different scenarios of escalation of trade wars to de-escalation. The S&P is now near the top of the range, he said.
“We think the most likely path is the deal. But escalation risks have risen and the growth backdrop is bit better so [investors should be] selectively staying involved in cyclicals and look for ways to hedge,” said Parker. “The S&P is probably trading much more in line with a status quo or some form of a deal. I would say it’s not pricing that trade war scenario.”
The seeming divide between Chinese officials and the Trump administration added to concerns, after week’s of positive commentary from both sides.
Hogan said China’s comments are problematic and could indicate the two sides are far apart. “They’re not going to back down from the parts of the deal they want. They don’t want to have a full account of the deal made public,” he said.