S&P 500 Rallies on Earnings Despite Warnings of Trade War Impact

S&P 500 Price Outlook:

• Strong earnings from Walmart and Cisco pushed the S&P 500 into the green, despite Mondays rout

• Amid inflation concerns on the back of the US-China trade war, a key Fed official said a rate hike is highly unlikely

• Traders remain overwhelmingly short the S&P 500. Find out how to use IG Client Sentiment Data with one of our Live Sentiment Data Walkthroughs

S&P 500 Rallies on Earnings Despite Warnings of Trade War Impact

The S&P 500 was in positive territory Thursday following strong earnings and solid economic data. Not willing to be left out, the Dow Jones and Nasdaq 100 were also higher – up 1.04% and 1.30% respectively. Despite a -2.35% selloff on Monday for the S&P 500, the index is now narrowly in the green for the week. That said, some of the optimism driving Thursdays rebound brought with it concern for the future as the US-China trade war progresses.

S&P 500 Price Chart: 5 – Minute Time Frame (May 13 – May 16) (Chart 1)

To that end, Cisco beat on both top and bottom lines in their fourth quarter. Alongside the beat, Cisco analysts issued optimistic guidance – above that of Street expectations. In response, CSCO shares traded 7% higher and are on pace for their largest intraday gain since February 11, 2016.

Cisco (CSCO) Price Chart: Daily Time Frame (February 2016 – May 2019) (Chart 2)

CSCO price chart with intraday rate of change in blue

Accompanying the beat were reservations regarding the US-China trade war. Cisco CEO Chuck Robbins said that the tariff hike from 10% to 25% had already been baked into the outlook, but that the company would be in contact with the Trump administration to make sure it understands the impacts of higher levies.

Similarly, Walmart delivered a healthy beat on both top and bottom lines. Consequently, shares traded nearly 4% higher before retracing somewhat as the session progressed. The retail-giant offered an encouraging outlook for both in-store and online revenue, with comparable sales for US Walmart stores climbing 3.4% in the first quarter – the best in 9 years. Web sales boasted a 37% increase, high enough to beat the corporations expectations. However, Walmart also issued caution regarding the US-China trade war.

USDCNH: Why 7.00 is the Spot to Watch in the US-China Trade War

The company said the price increases from higher levies would likely be passed on to consumers. On the matter, Walmart CFO Brett Biggs said “we will do everything we can to keep prices low but increased tariffs lead to increased prices. It is very item and category specific. There are some places where as we get tariffs, we will take prices up.” He continued, saying, “shifting sourcing or finding more manufacturers outside of China is one of a number of actions that our merchants are considering.”

It is widely believed amongst Wall Street analysts that the company will set the tone for other discount retailers due to their size and clout. Should that be the case, US retailers could see their supply chains altered as Chinese products become more expensive. The prospect of higher prices for consumers has given rise to inflationary concerns elsewhere.

3 Major Global Themes and How Best to Trade Them

Fortunately for equity bulls, Fed Governor Brainard delivered an explicit case for why an uptick in inflation from the US-China trade war would not result in a rate hike. Regarding a potential overshoot of the Feds 2% inflation target, Governor Brainard dispelled the possibility of a hike saying, “the Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement.”

View A Brief History of Trade Wars for background on economic conflicts like the US-China trade war.

While the comments from Governor Brainard are just one piece of the Feds policy puzzle, they do serve to highlight the willingness of the Fed to overshoot their 2% target. In turn, a key inflation hedge like gold could see increased demand, leaving risk-assets like the S&P 500 to grapple with the implications of higher inflation and low rates.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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