A cooling of the US-China trade war is a bullish prospect for the stock market that few investors are considering, JPMorgan says

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• A cooling trade war between the US and China could have a big impact on the stock market, according to JPMorgan.
• The stock market would rise, inflation would cool, and supply chain bottlenecks would ease if Biden reverses existing tariffs, the bank said.
• "The possibility of easing US-China tariffs is a non-consensus tailwind for US and China equities," JPMorgan said.

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US stocks will have more upside ahead if the US reverses existing tariffs on China and lowers the temperature of the ongoing trade war, JPMorgan's Marko Kolanovic said in a note on Monday.

While few have considered the potential for a trade-war reversal between the US and China, the move might materialize ahead of the 2022 US midterm elections, as it would align with President Joe Biden's campaign commitment, address business concerns, and provide consumer relief at a time of elevated inflation, according to the note.

Any reversal of the policy represents a "non-consensus tailwind for US and China equities" as it would help contain inflation, ease supply chain pressures, and boost corporate earnings, thus leading to a rally in stock prices.

"A reversal of existing tariffs could represent a direct earnings per share benefit of $5 for the S&P 500 with up to an additional $5 from second-order effects," Kolanovic said. The bank estimates that trade tariffs have cost consumers and businesses a cumulative $128 billion since they went into effect in 2018.

The first two phases of tariffs on Chinese goods, put in place by the Trump administration, reduced earnings per share by 7% to 8% for S&P 500 companies through first and second-order effects. There are currently $350 billion to $370 billion tariffs in place.

"Thus, even a partial unwind would be a source of margin and earnings upside from lower friction costs, while also supporting labor market recovery and helping ease supply chain issues," Kolanovic said.

Stock market sectors poised for the most upside if tariffs are withdrawn are the same sectors that were hurt most when they were initiated, including industrials, materials, technology hardware, and consumer discretionary, Kolanovic said.