By Akane Otani and Ben Eisen 

Trade fears have slammed markets around the world, but U.S. stocks are rising as strong profits and spending lead investors to overlook the risks of a downturn.

The S&P 500 and Dow Jones Industrial Average have gone up all but one day since the U.S. and China imposed tariffs on $34 billion of each other's goods on July 6. The S&P 500 is now up 4.8% for the year.

However, international markets have taken a hit: the Shanghai Composite has dropped 14% for the year, South Korea's Kospi Composite Index has shed 6.3%, Germany's DAX has lost 2.9% and Japan's Nikkei Stock Average has declined 0.7%

Some analysts said U.S. markets aren't reflecting possible repercussions from more trade barriers. Tariffs on steel and aluminum have already hurt shares of U.S. manufacturers and producers, even as most stocks have largely been spared.

With the trade tariffs, the U.S. is "shooting itself in the economic foot," said Richard Bernstein, chief investment officer of investment adviser firm Richard Bernstein Advisors.

Should global trade slow broadly or the prices of goods jump, that could in turn cut into spending by consumers and businesses. A 10% rise in import costs could hurt foreign sales and chip away 3% to 4% from per-share earnings growth, Bank of America Merrill Lynch analysts found in a report.

"The markets are kind of treating the trade dispute as cheap talk. That's a bit of a miscalculation from the political risk point of view," said Mark Rosenberg, chief executive of GeoQuant, which uses artificial intelligence to project geopolitical developments and their impact on markets. "There is going to be some more concrete damage."

The U.S. stock market's resilience amid tense trade talks suggests investors are viewing trade-related market ructions as buying opportunities instead of warning signs. The S&P 500, which fell 0.7% on Wednesday after the Trump administration unveiled plans to place tariffs on an additional $200 billion of Chinese goods, rebounded 1% over the following two days, more than recovering from those losses.

Going back to the beginning of March, when trade feuds flared up, the S&P 500 has erased daily declines of at least 1% in an average of 12 trading days, according to the WSJ Market Data Group, and trading volumes have been relatively muted. By contrast, it took an average of almost 17 days to rebound in the three years through February.

The U.S. is in a better position to withstand economic downturns, some analysts said, even if other countries are hit, making the U.S. market a relative haven. Even after a nine-year stock rally, U.S. corporate earnings are strong and consumer confidence is robust. That stands in contrast to the global growth outlook, which has cooled as business activity has slowed and a strengthening dollar has roiled emerging-market debt and currencies.

Goldman Sachs estimates exports to China make up 1% of U.S. gross domestic product. That makes it unlikely tariffs will have a material impact on the earnings growth of U.S. multinational companies, according to the firm.

"If somebody's going to get hurt if we engage in some kind of trade war, it's far more likely to be China than the U.S.," said Mark Grant, chief global strategist and managing director at B. Riley FBR Inc.

To some, the market's calm also reflects the outlook that tariffs won't substantially threaten corporate profits. Analysts remain optimistic about future earnings: Bank of America Merrill Lynch raised its 2018 and 2019 earnings-growth estimates for the S&P 500, citing strong U.S. economic data and better-than-expected earnings in the first half of the year.

"It's pretty difficult to get a really dire economic scenario just from the tariffs," said Ed Campbell, a senior portfolio manager at QMA. He said his firm, which is more optimistic about growth in the U.S. than in the rest of the world, has been skewing the equities in its multiasset portfolio toward U.S. stocks.

Morgan Stanley researchers found about a fifth of the volatility in the U.S. stock market since the beginning of March can be explained by trade risk.

"Trade risk is not systemic across equities," said Brian Hayes, a quantitative analyst at the bank. "There were idiosyncratic risks, but it was not affecting the overall market."

Still, some parts of the market are already reflecting burgeoning unease, investors said.

Investors are pouring more funds into the S&P 500 utilities sector -- considered a safer bet because of its relatively big dividend payouts. The sector has risen 8.1% over the past four weeks, soaring past the broader index's 0.9% advance across the same period. Shares of smaller, more domestically focused U.S. firms, which are seen as more insulated from global issues, have also outperformed, with the Russell 2000 more than doubling the S&P 500's gain for the year.

The gap between yields on short- and longer-term Treasurys has narrowed to nearly 11-year lows, something some analysts worry points to an increasingly murky outlook among investors about economic growth.

Short-term rates have exceeded longer-term ones before every recession going back to at least 1975. Analysts are divided over what the recent flattening of the yield curve signals, with some arguing it has largely stemmed from short-term interest rates rising with the Federal Reserve's rate increases and others saying it reflects the risk that restrictive trade policies will cut into global growth.

Given the uncertainty, some are projecting a dire scenario if the trade strife heightens. The S&P 500 could fall as much as 21% to around 2200 if the U.S. and China slap 30% tariffs on each other's goods and global auto tariffs are levied, UBS analysts found in a report.

But so far, the markets are "ascribing a very low probability" of a worst-case scenario panning out, said Keith Parker, chief U.S. equity strategist at UBS.

"There's too much at stake on both sides to let relationships deteriorate to that point," Mr. Parker said.

--

Peter Levin

contributed to this article.

Write to Akane Otani at akane.otani@wsj.com and Ben Eisen at ben.eisen@wsj.com

 

(END) Dow Jones Newswires

July 15, 2018 19:36 ET (23:36 GMT)

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