More Stock-Market Volatility Expected as U.S., China Dig In Heels Over Trade

The stock market recovered some of its losses Tuesday. But major indexes remain down more than 4% from their records, and Wall Street analysts are urging investors to brace for further turbulence.

The S&P 500 and Dow Jones Industrial Average climbed at least 1.2% Tuesday, steadying major indexes after a series of losses in the days following President Trump’s threat of new tariffs on Chinese imports next month. The S&P 500 fell 3% Monday, and the Dow Jones Industrial Average tumbled 767 points, the indexes’ biggest one-day percentage drops since December.

Although stocks got a reprieve Tuesday, analysts at Bank of America Merrill Lynch,

Goldman Sachs Group

UBS Group

and other firms are warning investors that markets are likely to get a lot choppier through the rest of the summer and fall.

For many, the new assessments reflect a reality that seemed hard to grasp just a year ago: Trade tensions aren’t likely to abate soon.

Investors are trying to find a sweet spot that takes into account the Federal Reserve’s decision to enact its first rate cut in more than a decade, additional trade tariffs on Chinese imports and tepid earnings reports so far this year.

“We’re under this misconception that trade will be solved quickly as opposed to it being an ongoing issue that will take a long time to work through,” said Jonathan Golub, chief equity strategist at

Credit Suisse

“If the president goes quiet for six weeks, we think it magically went away. That’s a mistake.”

After markets dropped sharply to close out last year, investors have spent much of 2019 bingeing on stocks. They bought under the assumptions that the Fed was committed to easing interest rates and the U.S. and China were working toward a trade resolution. The S&P 500 rose more than 20% between the end of last year and July.

But neither of those events panned out exactly as investors had hoped. The Fed somewhat played down the potential for further interest-rate cuts after its move last week, while Mr. Trump vowed to extend trade tariffs to another $300 billion of Chinese imports.

The Trump administration called China a currency manipulator after the yuan weakened past the psychologically important level of seven to the dollar. Here’s what this means for trade talks and the markets. Photo: AP

At the same time, corporate profit growth has been weakening this year amid a more challenging economic environment, especially among manufacturers.

Goldman Sachs recently cut its full-year earnings growth forecast for the S&P 500 to 3% from 6%, citing slowing economic growth, lower oil prices and weaker-than-expected profit margins, especially in the technology sector.

Given the new tariffs Mr. Trump announced, earnings growth could fall another 2%, somewhat offset by expectations that companies will hike prices.

Although Goldman expects volatility to buffet stocks in the near term, its analysts predicted that the S&P 500 will finish 2019 at 3100—a forecast made before the Fed’s interest-rate cut and the U.S.’s decision to move ahead with additional tariffs.

At the time Goldman released its target, stocks were 3.2% away from the forecast. As of Tuesday, the S&P 500 stood at 2881.77 and would need to gain 7.6% to hit Goldman’s target.

Bank of America Merrill Lynch analysts, meanwhile, reaffirmed their 2900 S&P 500 price target, suggesting the broad index will be stuck in a volatile trading range for the remainder of the year. Mr. Trump’s tweet caught the market off guard and raises the potential to weaken demand for U.S. goods as well as dent consumer and corporate confidence, analysts said.

The bank added that earnings-estimate revisions have weakened over the past three months, falling below historical averages to suggest muted or negative returns for stocks over the next two months.

When that happens, the S&P 500 rises an average of 1.1% over the next two months, Bank of America added.

“The rest of the year is likely to bring increased market volatility,” added Wells Fargo Investment Institute strategists Paul Christopher and Darrell Cronk in a note to clients. The bank is considering the likelihood that trade tensions may extend into 2020, meaning many companies could be dealing with tariffs for two years.

At just below 17 times its forward earnings over the next 12 months, the S&P 500 is trading close to fair value, Wells Fargo said, leaving little upside for further broad market gains as in the first half of the year. Investors should trim their strong performers and buy stocks with cheaper valuations, such as banks.

But the pressure on stocks can last only so long, Credit Suisse’s Mr. Golub added. Many investors shifted money from stocks to bonds, sending yields on 10-year U.S. Treasurys down to 1.74%. Stocks, meanwhile, carry a dividend yield of 2%.

That played out somewhat Tuesday. Stocks recouped some of their losses, Tuesday as the S&P 500 added 1.3%. Bond yields, meanwhile, rose slightly from multiyear lows as investors trimmed their Treasury holdings.

“If stocks give more yield than bonds, then retirees should consider buying stocks for yield,” Mr. Golub said. “It’s weird, but that’s where we are.”

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Write to Michael Wursthorn at

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