$DIA, $SPY, $QQQ, $RUTX, $BAC, $VXX
US are stocks rallying this year on signs of progress in US-S trade talks as managed and sidelined money continues to bet that there is not much upside left when President Trump’s deal is reached.
That is wrong
Heffx-LTN’s corporate earnings and equity valuations model as of Saturday indicates that the market has priced in a soft deal, meaning 1 where just some of the issues get resolved in favor of US businesses.
In that scenario, the S&P 500 could rise an additional 10%+ when a hard deal is struck. That would take the index to as high as 3,100 from Fridays close, a mark that exceeds the September 2018 all-time high at 2,930.
Both China and the US have expressed optimism over the progress during the negotiations this week, and BofAML (NYSE:BAC) pointed to a shrinking P/E multiple since tariff talks began last February, a sign of lingering fears over trade.
A hard deal with China means a brighter outlook for companies and the market, and a reversal of President Trump’s 2018 tariffs (he likes tariffs) all by itself would add 1% to the annual profit growth rate for S&P 500 companies.
“The indirect benefits to EPS from better growth, unleashed pent-up spending would likely be significant as well,” the BoAML analyst wrote in a note Friday.
Our senior economists, Shayne Heffernan, PhD expects a hard trade deal to be reached in 1-H of this year, as China’s financial markets are deep in Bear territory (-40%) and it economy is in a very painful state.
In the event of an all trade war we see a pull back of 8-11% in the S&P 500.
Below is how thing stack up as of today, as follows:
- Hard Deal: President Trump removes tariffs imposed in Y 2018, China commits to more imports, IP right protection and enforcement measures in place, and full access to China markets by US firms; S&P 500 rallies 10%+ to new highs
- Soft Deal: US maintains Y 2018 tariffs on imports, with strict oversight of agreed terms, China commits to more imports, some IP right protection plan, partial access to Chinese market; S&P 500 flat/unchanged pull back, and a buy the dip bounce to current marks.
- All out trade war: US hikes tariffs on $200-B of goods to 25% from 10%, China responds in kind, and S&P 500 gives back lion’s share of its Y 2019 gains.
Pay attention, it is your money and so, your responsibility, always take what the market gives.
Have a terrific weekend
Paul Ebeling
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