Is the China-U.S. trade spat about to ruin the S&P 500 bull run?

The U.S. benchmark climbed as much as 0.57 per cent to 2,873.09 points just before 1 p.m. ET.

The S&P 500 roared to a fresh all-time intraday high on Tuesday, fuelled by strong earnings and enthusiasm for corporate tax relief. It was a second milestone on a day that also saw the index match its longest-ever bull-run.

The U.S. benchmark climbed as much as 0.57 per cent to 2,873.09 points just before 1 p.m. ET, besting the previous record high of 2,872.87 on Jan. 26. The index has packed on over seven per cent year-to-date.

That upward momentum will be short-lived, according to Capital Economics markets economist Oliver Jones.

“We doubt that strong earnings will continue to bolster the index,” he said in a note to investors on Tuesday. “And we suspect that the U.S. economy will not remain in fine fettle for much longer.”

The ongoing S&P 500 rally has weathered a barrage of geopolitical tensions as U.S. President Donald Trump seeks to even his country’s trade scorecard with tariffs against the world’s largest economies.

A record-setting 79 per cent of firms in the index topped analyst expectation in the second quarter, according to data from Standard & Poor’s. Earnings per share in the index also rose by six per cent, versus the same period last year.

“Unexpectedly strong sales growth contributed (probably related to the health of the U.S. economy), and operating margins also climbed to their highest since data began (helped by the corporate tax reform),” Jones said. “The boost to margins from corporate tax reform should now be accounted for in analysts’ expectations.”

While the S&P 500 has largely shrugged off concerns of a trade war with China, he expects stocks will start to suffer if tensions ramp up.

That seems increasingly likely given recent comments by Trump suggesting that no time frame exists to end the trade dispute. Low-level talks between the two nations are set to begin on Wednesday.

Tariffs on US$16 billion worth of imported Chinese goods are set to take effect on Thursday. The U.S. Trade Representative’s Office is also holding hearings this week on proposals for tariffs on a further $200 billion of Chinese goods.

“China will not be able to respond in kind, as $200 billion is more than the total value of China’s annual imports from the U.S.,” Jones said. “We think that it (China) will resort instead to targeting U.S. multinationals operating in China directly, which might hit U.S. equities harder.”

While a trade truce between the U.S in China is always possible, such a deal would not necessarily cause Jones to rethink his bearish outlook for the index’s 500 U.S. large caps.

“Given our forecasts for the U.S. economy, particularly in 2019, we suspect that the S&P 500 will end up falling regardless,” he said.

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