The latest escalation of trade tensions between the U.S. and China has barely led to a 5% correction in stocks. But further downside — a 10% decline — is possible should an “all-out trade war” take shape, according to new forecasts from Barclays analysts.
“Our analysis indicates that an across-the-board 25% tariff on the entire U.S.–China trade could hurt 2019E earnings by ~2.2%,” the analysts wrote, referring to the possibility on 25% tariffs on $550 billion worth of imports from China.
That would put the S&P 500 (^GSPC) closer to 2,550, or a roughly 10% drop from current levels, per Barclays.
Its base case, however, is for the S&P 500 to descend to 2,750 should the recently announced 25% tariffs on $250 billion worth of goods take shape (they are set to take effect June 1). That would be a softer decline of roughly 4% from current levels.
The other factor weighing on earnings growth for S&P 500 companies is weakness in China’s economy, since many companies derive revenue from overseas.
“The Chinese credit cycle has been the primary driver of the slowdown in non-U.S. macro growth and the earnings growth for internationally focused U.S. companies,” the analysts wrote, adding that the odds of a rebound in China’s credit cycle are slim.
“Although the policies implemented by the Chinese policymakers over the past few months appeared to be making an impact and China’s economy was showing signs of rebound, the latest round of economic data indicates a soggier soft patch and that it is too early to call a bottom,” they wrote.
Barclays points to recent data showing falling China exports, along with the weakening of the National Bureau of Statistics of China’s (NBS) Manufacturing PMI index, a key gauge of manufacturing activity.
This economic weakness in China can already be seen in the corporate earnings picture.
“While stocks with high international sales have seen limited declines in 2019 earnings expectations (-0.3% since 3/2019), companies with no international sales have seen a pickup in 2019 earnings expectations (+0.4% since 3/2019),” the analysts wrote.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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