Navigating Market Volatility Amidst Trade Uncertainty

Financial markets are experiencing heightened volatility, a trend exacerbated by recent trade policy announcements. The global economic landscape is shifting, requiring investors to reassess traditional valuation models. This analysis delves into the evolving dynamics of key markets,offering insights into potential investment strategies.

Investors are currently navigating a complex surroundings characterized by fluctuating trade tensions.These tensions involve increased tariffs, exemptions on specific products, and dollar depreciation, all contributing to uncertainty in the bond market and concerns about U.S. debt. The interplay of these factors necessitates a revised approach to market analysis.

Deconstructing Market Scenarios: Negotiation, Retaliation, and De-escalation

Previously, market behavior was categorized into three potential scenarios: negotiation, retaliation, and de-escalation. However, recent developments have blurred these lines, making accurate predictions more challenging. This complexity necessitates a deeper understanding of how these scenarios impact global economic structures and stock market valuations.

• negotiation: A scenario where the U.S. demonstrates flexibility in trade negotiations.
• Retaliation: A scenario where global economies respond to U.S. trade policies with counter-measures.
• De-escalation: A scenario where trade tensions ease, perhaps leading to a retreat from aggressive trade policies.

U.S. Stock Market: Hit by Value and Profit Pressures

The U.S. stock market faces important headwinds due to trade-related uncertainties. The prospect of domestic production increases costs, potentially shrinking profit margins and reducing the value of shares.

Under a base-case scenario, S&P 500 profit growth is estimated at only 5% for the year. P/E ratios are pressured by uncertainty, potentially stabilizing at 20x, which aligns with the 5-year average.The projected S&P 500 target is 5,200 points.

Though, a more aggressive retaliation scenario could stifle profit growth and decrease margins, potentially driving the market back to a P/E ratio of 17.5x,the average following the 2008 Global Financial Crisis (GFC). Even in a de-escalation scenario, uncertainty may prevent the multiple from returning to previous targets. The average value, considering these probabilities, is approximately 5,000 points, with a fluctuation range of around 20%.

Chinese Stock Market: A Shift in Investor Sentiment

Prior to recent trade escalations, Hang Seng (HSI) and CSI 300 were projected to experience profit growth of 5% and 10%, respectively. However, both markets are now indirectly affected by the slowing Chinese and global economies.

In a retaliation scenario, Chinese authorities are expected to stimulate the economy to support CSI 300 profits more effectively than HSI. Chinese stocks are likely to outperform when the financial world returns to a de-escalation mode, notably if tech shares are included.

The average new target for HSI is 21,000 points, while CSI 300 is around 3,400, reflecting 10x and 13x of 2024 profits, respectively.Fluctuations are expected to be approximately 30%.

The Chinese stock market, once considered a high-growth, premium-valued market, now faces the risk of base adjustments.

European and Japanese Markets: Discounted Valuations Offer Relative Stability

European and Japanese stock markets present a comparatively more favorable outlook due to their discounted valuations.

The stoxx 600’s strength lies in its low growth and valuation, which limits downside risk compared to the U.S. and China.

In negotiation and de-escalation scenarios, profits may not grow from the previous year. However, P/E ratios could rise to 14x in a negotiation scenario, matching last year’s average. If trade tensions ease, P/E ratios may return to 15x, the average after the European Debt Crisis.

The average new target for stoxx 600 is 510 points,with a 20% fluctuation range.

japan’s Topix Index, heavily reliant on domestic consumption, has been a weakness. Regardless of retaliation, negotiation, or de-escalation, profit growth is not expected to vary significantly.

In a de-escalation scenario, the market may return to previous trading levels. Even with retaliation,the P/E ratio is expected to be pressed to 13x,the lowest since 2005.

Topix’s new target is 2,600 points, with a fluctuation of 16%, lower than other markets.

Navigating Uncertainty: A Framework for Investment

The post-trade announcement financial landscape is markedly different, impacting both growth trends and market strengths. For investors, particularly those in politically uncertain environments, the key is not precise prediction but a feasible framework for determining a reasonable investment strategy.

All Models Are Wrong, But Some are useful.

George Box, British Statistician

In an era of high uncertainty, it is crucial to avoid rigid adherence to original market goals and beliefs. instead, investors must understand the underlying principles to adapt appropriately to evolving situations.

Key Market Index Targets for End of Year 2025

Projected targets for major stock market indices under various scenarios.