With the Federal Reserve meeting, monthly jobs report and the bulk of the earnings season behind us, U.S. equity investors will have no choice but to turn their focus back to global trade headlines in coming weeks.
Much will depend on incremental news from various trade negotiations happening concomitantly as the Trump administration’s delegation arrived in Beijing last week to hammer out a deal with the world’s second-largest economy.
Concerns over global trade and potential trade wars may have been keeping investors on the sidelines despite solid earnings season and positive economic background, so far.
The S&P 500 index SPX, +1.28% remains nearly flat since the start of the year, having traded in a wide range over the past two months. On Friday, the S&P 500 closed 1.2% higher at 2,663.42, about 7% below its January peak.
But even with the recent volatility, the market cannot accurately price in all the potential risks of trade wars, according to Kristina Hooper, chief global market strategist at Invesco.
“It is difficult to do any kind of solid analysis of trade negotiation because there are so many potential outcomes from the China negotiations alone,” Hooper said.
Indeed, little progress was made in trade talks between Beijing and Washington officials so far, as neither side could find common ground on sweeping demands.
The U.S. asked China to cut its trade surplus by $200 billion while the Chinese officials sought to get Washington to ease national-security reviews of Chinese investments.
An inability to strike a deal could lead to retaliatory tariffs, the impact of which has been seen in some commodity prices already, such as steel and aluminum.
“There are obvious traditional retaliation weapons such as tariffs or quotas. And then there are nontraditional weapons such as foreign policy and currency wars,” Hooper said. “A combination of tariffs, geopolitical conflicts and deterioration in earnings outlooks can be quite bad for the market,” she said.
But that isn’t the most likely outcome for Hooper, who estimates that markets are likely to finish the year with high single-digit gains, given the mostly solid earnings growth that has been reported thus far.
Hank Smith, chief investment officer at Haverford Trust Co., sees the market action as quite healthy, despite the recent bout of volatility that erupted in early February, sending the Dow Jones Industrial Average DJIA, +1.39% and the S&P 500 into correction territory, defined as a drop from a recent peak of at least 10%.
“Wage growth was the first big catalyst for the correction that we’re still in,” Smith said.
“The second catalyst was talk about trade and tariffs. We didn’t know what to do with that, but if we get through May and June and see that it was a lot of rhetoric and posturing, that few—if any—tariffs will get enacted, then that headwind will turn into a tailwind,” the Haverford CIO said.
Smith said the enactment of hard-hitting tariffs, leading to an actual trade conflagration, could, of course, kick market angst into higher gear.
The challenge for Wall Street will come from the fact that any negotiations between nations, unlike corporate negotiations, are usually public, according to Art Hogan, chief market strategist at Wunderlich Securities.
“Unfortunately, we’ll likely get whipped around by headlines. Any signs of success or positive commentary will be good, while any setbacks or negative commentary will hurt,” Hogan said. “So far, the tone [in the China-US negotiations] has been good,” he said.
Next week is fairly light on economic news. Wholesales price index is due on Wednesday at 8:30 a.m. Eastern Time, while consumer-price index is released on Thursday at 8:30 a.m.
But investors will hear from several Fed speakers, who offer more insight into the central bank’s monetary policy strategy.
Robert Kaplan, president of Federal Reserve Bank of Dallas, and Charles Evans, president of Federal Reserve Bank of Chicago, as well as Thomas Barkin, president of Federal Reserve Bank of Richmond are scheduled to speak on Monday.
Raphael Bostic, president of Federal Reserve Bank of Atlanta will speak on Wednesday. James Bullard, president of Federal Reserve Bank of St. Louis is on deck Friday.
With 81% of companies having reported earnings already, next few weeks will wrap up the entire season. Among the S&P 500 companies, 47 will report earnings next week, including Nvidia Corp. NVDA, +2.61% Costco Wholesales Corp. COST, +1.13% Dow component Walt Disney Co. DIS, +2.42% and Tyson Foods Inc. TSN, +1.39%