S&P 500 Could Fall 5% if 25% Tariffs on China Levied: UBS

U.S. stocks could soon be knocked off their perch by a new round of trade tariffs against China, according to UBS.

In a research note, reported on by Bloomberg, Keith Parker predicted that American stocks might be set to encounter their biggest fall since April if President Donald Trump imposes tariffs at the higher end of expectations. Introducing a 25% levy on an extra $200 billion of Chinese goods, the analyst warned, could see the S&P 500 drop 5% as investors have yet to price in these risks and likely retaliatory measures.

UBS’s economists believe that the tariffs will come into force by the end of September at 10%, the lowest end of the spectrum.

Talk of fresh tariffs being introduced against China isn’t a new development, although so far the risks associated with an ongoing trade war don’t appear to have unsettled investors this side of the pond. (See also: Risks Continue to Mount as Stocks Reach Highs.)

The S&P 500 has risen for five consecutive months to reach record highs, rewarding investors who have positions in the main exchange-traded funds that track the index, including the SPDR S&P 500 ETF (SPY), iShares Core S&P 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO). In contrast, the S&P 500’s Chinese counterpart, the Shanghai Composite Index, has fallen into a bear market. (See also: Top 3 ETFs to Track the S&P 500 as of August 2018.)

Parker argued that a worse-than-expected tariff announcement could also see U.S. stock market investors become more bearish, particularly as it would come at a time when American companies enter a share repurchase blackout period

“A 25 percent tariff rate could be construed as an escalation and would have a greater earnings impact,” Parker wrote. “The corporate bid will slow again in September and reach a trough in early October, which may coincide with the implementation of tariffs.”

On a more positive note, Parker predicted that any pullback is likely to be brief, adding that there are several developments that could counter trade war risks, including the start of the earnings results season and midterm elections, as well as growing speculation that the Federal Reserve (FED) might take a break from hiking interest rates further later in the year.

“The Fed skipping a hike in December, our economists view, could provide an important offset for trade risks, particularly since the USD has been a key driver of relative equity returns,” said Parker.