Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Earnings Rally on Hold in S&P 500 as Trade Anxiety Surfaces Anew

(Bloomberg) -- A four-day, 81-point rally in the S&P 500 lost steam Wednesday, pausing on the eve of one of the best earnings seasons in a decade, as investors got a reminder that the trade war still exists.

Futures on the equity benchmark were down 0.7 percent as of 7:01 a.m. in London after earlier falling as much as 1.1 percent. Dow Jones Industrial Average contracts declined as much as 1.3 percent after the Trump administration released a new list of Chinese products that may face tariffs. News of the escalation came after the S&P 500 cash index had gained nearly 3 percent since Independence Day.

A respite from trade tensions had given cover to U.S. equity bulls in the runup to a second-quarter reporting season that promises earnings growth of 20 percent or more. It came as the S&P 500 sits within 7 points of 2,800, a chart level it has failed to overcome three different times since markets buckled in February.

“This latest story will serve as a reality check for the market, reminding investors to reconsider how aggressive they want to be,” said Michael O’Rourke, chief market strategist at JonesTrading. “Regardless, the $200 billion in potential additional tariffs is not a surprise. The president made everyone well aware of them.”

Earnings Rally on Hold in S&P 500 as Trade Anxiety Surfaces Anew

The White House’s list targets $200 billion worth of Chinese goods subject to a 10 percent tariff. Such a threat had been discussed by the Trump administration last month after China said it would retaliate against industries considered politically sensitive to Trump for seeking duties on $50 billion worth of Chinese goods.

Eruptions of trade angst have repeatedly scotched rallies in U.S. stocks since they bottomed in February, muting the impact of earnings growth that in the first quarter exceeded 24 percent, the most since 2010. Surging profits, aided by Trump’s tax breaks, are central to a valuation case on the S&P 500 that says stocks are reasonably priced at about 17.5 times calendar 2018 profit estimates.

Pessimists say a host of threats, which also include the withdrawal of central bank stimulus and an aging economic recovery, make forecasting even the rest of 2018 futile, and warn S&P 500 earnings growth has already peaked.

“The longer-term impact of tariffs will be likely felt in the back half of the year and combined with a Fed that is hiking rates, could provide the fuel to push the U.S. economy into a recession later in 2019,” said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago. “I’m befuddled by the markets ignoring the implications of higher prices either in inflation figures or lower margin/profits down the road.”

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