Sizing Up the Hit to S&P 500 Earnings From an Actual Trade War

(Bloomberg) -- Yesterday’s S&P 500 selloff reawakened traders to the hazards of a trade war. How much might it actually cost in the market? Here’s an accounting in three charts.

EPS Hit

Companies in the S&P 500 rely on foreign markets for about a third of their revenue. According to Bank of America Corp. strategists led by Savita Subramanian, a 10 percent increase in import costs from trade tariffs would reduce the S&P 500’s per-share earnings by 3 to 4 percent. In isolation, that would leave earnings at $153.10 a share this year, not the $158.70 analysts currently estimate. A separate Goldman Sachs Group Inc. model puts the hit to per-share earnings at 2 or 3 percent.

Foreign Sales

Companies that are less reliant on foreign sales have fared better of late than those with higher exposure. A Goldman Sachs basket of stocks with the most international revenue has lost 1.1 percent since trade tensions started escalating in March. That compares with a 4 percent gain in companies with the largest exposure to domestic sales. The ratio between these indexes is near levels last seen almost two years ago.

Tech Concern

Technology stocks, market darlings since late 2016, have risen more than three times faster than the broader market this year. Reports on Monday that the U.S. Treasury department will propose limits on Chinese technology investment pushed the Nasdaq down by the most since April. Information technology stocks rely on foreign sales for about 59 percent of their revenue, the most among industry groups.

S&P 500 Slide

Wall Street strategists have begun publishing views on what a trade war might do to equity prices. The S&P 500 will slide to 2,635 in the third quarter amid an escalation of trade tensions, a stronger dollar and speculation of faster monetary tightening, Barry Bannister, chief equity strategist at Stifel Nicolaus, said in a note last week.

Analysts at Morgan Stanley analysts urged investors to go defensive while Citigroup flagged a potential bubble in growth stocks.

--With assistance from Lu Wang.

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

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Jeremy Herron

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