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GOLDMAN: How Trump’s trade war impacts stocks and what to invest in



david kostin
Kostin has some recommendations for investors worried about trade


  • Trade disputes between the US and China have had a
    muted impact on the stock market so far. 
  • However, should they worsen, Goldman
    estimates a 15% hit to S&P 500 earnings next
  • The firm’s chief equity strategists offered two trades
    for investors who are worried that the trade war will get

So far,
trade disputes
between the US and China have resulted in only
brief episodes of volatility in the stock market. 

Some investors aren’t even going as far as calling it a
full-blown trade
 yet. But with both countries showing no signs of
backing down, Goldman Sachs’ equity strategists have laid out the
impact that escalating tensions could have on the market. 

This year, the Trump administration has imposed a 25% import tax
on $34 billion worth of Chinese goods, and has also

threatened to hit another $400 billion
worth of products with
tariffs due to China’s retaliation. 
It has also
imposed and threatened tariffs on Canada, the European Union, and
Mexico in its quest for what it considers fairer trade. 

There are two ways that trade disputes could hurt the earnings of
S&P 500 companies, according to David Kostin, Goldman’s chief
US equity strategist. 

The first is by undercutting the revenues of companies that
export to China, mainly, and other countries with which the US is

“The tariff impact on S&P 500 EPS through lower revenues is
minimal,” Kostin said in a note to clients on Friday. This is
because just 2% of aggregate S&P 500 sales come from China,
he added. Even if the trade war went global, with 5% tariffs on
all trading partners, Goldman sees its 2019 S&P 500 EPS
forecast lower by 1% to $169. 

The second, more meaningful impact to US companies is via lower
margins, Kostin said. The flow of trade between the US and
China is much heavier in the China-to-US direction, and roughly
15% of the cost of goods sold has origins outside the US. 

“If tensions spread and a 10% tariff were implemented on all US
imports (highest rate since 1940s) our EPS estimate would fall by
15% to $145,” Kostin said.    

Investors have shrugged off this risk for now. Kostin saw no
strong link between trade disputes and the performance of
industries with heavy imports, such as petroleum and coal. The
S&P 500 has been stuck in a tight range and last hit an
all-time high 122 trading days ago, according to
Bespoke Investment Group
. It’s still up 5% this year.

But for investors worried that the trade war will worsen, Goldman
had two

  • Buy shares of companies that earn most of their
    revenues in the US.
    Goldman’s domestic-sales basket
    has outperformed the S&P 500 by 130 basis points since May,
    and includes companies like Charter
    , Target,
    and Wells
    , all of which have no non-US sales.  
  • Overwrite equities with S&P 500 calls expiring in
    December 2019, with a strike price of 2900.
    will outperform if the index rises by less than 9%, Kostin

Get the latest Goldman Sachs stock price here.

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