‘Hasty’ Trade Truce Won’t Shield S&P 500 Firms, BofA Says

(Bloomberg) -- The longer-term consequence of the trade war remains unresolved and that is putting earnings of America’s largest companies at risk, according to Bank of America Corp.

A “hasty” deal may shift focus away from the reversal of globalization, BofA strategists including Savita Subramanian warned in a note dated Oct. 10, a day before news broke that the U.S. and China agreed to the outlines of a deal. A quickly made pact “is not a market panacea,” they wrote.

Months of back-and-forth on the subject have forced U.S. and Chinese companies, particularly tech giants, to not rely on each other, creating parallel customer bases and supply chains. This isolation crimps globalization, the force that’s been responsible for 50% of S&P 500 companies’ margin growth, Subramanian said. A decoupling between the two countries’ tech firms may precipitate a global recession, she said, citing the firm’s economists.

Optimism over a trade breakthrough faded Monday when people familiar with the matter said China wants further talks to hammer out the details of the “phase one” trade deal touted by Donald Trump before Xi Jinping agrees to sign it. That reversed gains in the S&P 500 futures, pushing them down 0.5% as of 6 a.m. in New York.

The S&P 500 rose 1.1% Friday and major global stock gauges climbed after Trump said the U.S. and China agreed to the outlines of a deal that could be signed as early as next month. Beijing consented to more than double its annual purchases of U.S. agricultural products, and Washington said it would holster another tariff hike set for this week. Left on the table were import taxes on all remaining Chinese imports slated for Dec. 15.

Higher tariffs will put the recovery of global growth at risk and, according to BofA, pose a threat to the stock prices of America’s largest companies. At least 20% of the variability of S&P 500 performance can be explained by long-term growth, data compiled by BofA show. By contrast, quarterly margins explain less than 1% of the variability of the index’s returns.

“Long-term growth matters far more than some margin compression and disruption in the near term,” Subramanian said. “Half of the margin expansion of the S&P 500 has come from globalization, and a reversal could be costly.”

To contact the reporter on this story: Elena Popina in Hong Kong at epopina@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Joanna Ossinger, Ravil Shirodkar

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