Bank of America cuts corporate profit forecast on trade war fears

Bank of America’s top stock strategist warned clients that the S&P 500 has yet to reflect the impact the U.S.-China trade dispute could have on profits.
“Globalization has been a key driver of S&P 500 margin expansion via tax arbitrage, labor arbitrage, supply chain efficiency gains, and the like,” Savita Subramanian writes.
Subramanian, who sees the S&P 500 finishing the year at 2,900, added that her EPS target could be adjusted lower again if tariffs continue to increase.
Bank of America cut its 2019 profit outlook for the stock market’s biggest companies on Monday, citing renewed trade tensions between the United States and two key trading partners.

The bank’s head of U.S. stock strategy warned clients that the market’s price has yet to reflect the impact the dispute between Washington and Beijing could have on long-term earnings, and reduced her S&P 500 earnings per share target to $166.

“Globalization has been a key driver of S&P 500 margin expansion via tax arbitrage, labor arbitrage, supply chain efficiency gains, and the like,” Savita Subramanian wrote. “US companies have not been able to exert enough pricing power to offset the rising cost pressures, as evidenced by our Corporate Misery indicator, a macro gauge of margin risk.”

Subramanian, who sees the S&P 500 finishing the year at 2,900, added that Monday’s 1.2% cut to her prior target of $168 could be just the start of the downgrades if Chinese tariffs continue to increase. Taxes on all Mexican imports — on track to rise to 25% by October barring progress on immigration — could ultimately curb S&P earnings by an additional 0.6%.

May was an especially tough month on Wall Street as the Trump administration’s move to hike tariffs on goods imported from China and plans to tax all goods from Mexico took investors by surprise. Traders who’d assumed that American and Chinese trade negotiators would be able to reconcile thorny intellectual property issues later punished risk assets, sending the Dow Jones Industrial Average plunging more than 1,700 points while the S&P 500 sank 6.5%…

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