President Trump's China tariff threat poses a 'real risk' to markets, strategist says

Market Reaction to Trade Tensions - The market reacted negatively to renewed US-China trade tensions, with stocks sliding as President Trump threatened significant tariff hikes on China [1][2] - Investors were looking for an excuse to sell, and the current situation provided that opportunity, leading to a 2% selloff not seen in six months [2] Tariff Risks and Economic Outlook - If the truce between the US and China is not extended by November 10th, tariffs could escalate to 145%, raising concerns about trade tensions [3][5] - Despite current volatility, there is a belief that the economic policy mix, including Fed rate cuts and fiscal stimulus, will support market recovery by 2026 [4][8] Investment Strategy - The company remains bullish on buying the dip, focusing on cyclical sectors such as consumer discretionary and financials, anticipating higher earnings expectations for 2025 and 2026 [4][8] - A steeper yield curve is expected as the Fed continues to cut rates, which will likely boost loan activity and M&A, supporting the financial sector [9] Earnings Expectations - Current GDP growth is projected at 3.8%, with job creation averaging 29,000, indicating potential for higher revenues and stable cost structures, which should enhance corporate earnings [12][13] - Earnings delivery is expected to broaden beyond the largest companies, benefiting small and mid-cap stocks as well [14] AI Investment Sentiment - The cost of not investing in AI is perceived to be greater than the risks of overinvestment, with investor sentiment remaining positive towards companies aggressively investing in AI technology [15] - There is a belief that tangible signs of overinvestment are needed before investors will react negatively to the current AI capital expenditure cycle [15] Government Shutdown Impact - The government shutdown is expected to shave about 15 basis points off GDP for each week it continues, but the overall economic trajectory and earnings expectations remain unchanged [17][18]