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The U.S.-China trade war won't end any time soon so 'Investors should be a lot more cautious'

Brian Sozzi
Editor-at-Large

Investors need to wake up — President Donald Trump’s trade war with China is unlikely to end overnight. Even if a deal is sealed before the June G20 summit in Japan, lasting damage has probably been done in terms of trade relations between the two superpowers.

And as a result of those things, the stock prices of some very large multinationals like Apple (AAPL) and Boeing (BA) — and the still inflated valuations — probably deserve a haircut. Yet, investors seem completely out to lunch on this one.

“Stock prices and risk bond prices are reflecting a degree of complacency — or at least reflecting the fact that investors believe there will be a resolution soon,” David Leduc, Mellon fixed income chief investment officer, said on Yahoo Finance’s The First Trade.

“In our opinion right now, risky asset prices are really sanguine about the prospects about the resolution of the trade war in the near-term,” added Leduc. “We think investors should be a lot more cautious.”

Perhaps said complacent investors should mentally digest the latest reality check from the pencil pushers at Goldman Sachs.

Goldman Sachs says that if the 25% tariff on all imports from China go into effect — as Trump has strongly suggested — it could reduce S&P 500 earnings per share estimates by 6%. The investment bank reminds investors that while S&P 500 companies get about 2% of their sales from greater China, they import 30% of their inventories from the country.

So not only do a company’s costs stand to rise meaningfully from 25% tariffs on China, but their sales could slow as price increases are taken and consumers balk.

Despite this very real risk, markets generally aren’t too far removed from their late April highs. Moreover, Goldman notes that negative 2019 earnings revisions — which became the norm during the late 2018 market meltdown — have abated after a solid first quarter earnings season from Corporate America.

Can you say complacency? Investors don’t appear to be pricing in the rally in oil prices, either.

Real corporate profits are risky, and so are stock prices. The sooner investors realize low interest rates from the Federal Reserve can’t solve everything, the better off they will be.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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