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The ramifications of the U.S.-China trade war are being felt far and wide. Now, the dispute is causing Wall Street analysts to take drastic measures and remove their buy ratings on stocks in their coverage universes.
Companies feeling the heat cover a wide range of sectors and it appears almost no one is being spared. They include stocks like Owens Corning, American Eagle, Melco Resorts, Duke Realty, G-III, Steven Madden and China Southern Airlines.
While the S&P 500 hit an all-time closing high in April, it’s now down more than 2% this month due to the ongoing trade escalation.
The retail sector is one group widely believed to be among the most vulnerable to tariffs, according to many analysts.
This week Piper Jaffray decided it had seen enough and downgraded Steven Madden and G-III Apparel over the dispute. “We are downgrading SHOO & GIII from OW to Neutral as tariff rhetoric accelerates across our group weighing on names that have large U.S. businesses & a disproportionate share of production in China,” analyst Erinn Murphy said.
“Even if there is tariff relief in the next month–we are not certain we’ll see a full recovery of the multiples,” she said.
Steven Madden is down more than 2% while G-III has fallen more than 13% this week.
The feeling was mutual over at Wedbush where analyst Jen Redding downgraded American Eagle Outfitters.
“Although we continue to remain bullish on American Eagle over the long term, we now have less conviction in runway for shares as we approach our price target in what we view as an increasingly volatile retail environment, until investor visibility into a US-China trade settlement improves, and are stepping to the sidelines for now,” she said.
Shares are down more than 6% this week.
Building materials, real estate
Construction stocks are another group that likely will feel the tariff pinch from higher costs for materials, Nomura Instinet analysts said.
“Companies most dependent on housing growth to suffer demand deterioration from 25% Tariffs,” analyst Michael Wood said in his downgrade of construction materials maker Owens Corning.
“In our view, the best-case scenario is that over the next four weeks, U.S.-China negotiators reach a deal and avoid any noticeable impact to U.S. economic growth or consumer confidence, but this looks increasingly unlikely,” he said.
The stock is down over 4% this week.
Elsewhere in real estate, warehouse renters could take a hit because of reduced imports coming from China.
Duke Realty, a real estate investment trust which provides warehouse solutions was downgraded by analysts at Bank of America. “Recent tariff announcements and threats from both the US and China suggest a bumpier road to a trade deal than previously expected,” they said.
While the analysts remain positive on the sector overall, they did say that, “warehouse demand is highly correlated with GDP growth and BofAML Economists would expect a drag on growth if a trade war escalates.”
Shares of the company are up slightly this week 0.26%.
Here are what analysts are saying about the stocks downgraded because of the U.S.-China dispute:
Nomura Instinet – Owens Corning, downgraded to neutral from buy
“Companies Most Dependent on Housing Growth to Suffer Demand Deterioration from 25% Tariffs. Housing fallout hinges on equity market and trade spat duration. There is no roadmap to help quantify the impact from escalated tariffs on U.S. housing demand. Population growth and household formation drive demand long term, but given the large-ticket nature of home buying, demand can be postponed for years during periods of uncertainty or a soft economic backdrop. We forecast housing demand by cohort (entry-level, move-up, investor), which provides an understanding of the key demand drivers by cohort. We previously discussed these demand drivers in The iGen Super Cycle. There is a wide range of potential paths to the housing cycle over the next few years. In our view, the best-case scenario is that over the next four weeks, U.S.-China negotiators reach a deal and avoid any noticeable impact to U.S. economic growth or consumer confidence, but this looks increasingly unlikely–we previously modeled this scenario.”
PiperJaffray – Steven Madden & GIII Apparel, downgraded to neutral from overweight
“We are downgrading SHOO & GIII from OW to Neutral as tariff rhetoric accelerates across our group weighing on names that have large U.S. businesses & a disproportionate share of production in China. While both management teams are resourceful, have strong relationships with their retailers and have already made meaningful progress diversifying production in China, they still produce a large amount of their goods in China. We lower our estimates based on existing tariffs in place which we see impacting 2H earnings. While both vendors likely can increase pricing to some extent, we believe their overall exposure to China & recently proposed tariffs to the apparel/footwear categories will weigh on their multiple. Even if there is tariff relief in the next month–we are not certain we’ll see a full recovery of the multiples. As such, we prefer to sit on the sidelines with both stocks for now.”
Wedbush – American Eagle, downgraded to neutral from outperform
“We are lowering our rating on shares of American Eagle to NEUTRAL and are removing AEO from the Wedbush Best Ideas List, as shares approach our $25 price target. We remain bullish on American Eagle over the long term with proprietary data signaling a first quarter beat owing to strength in merchandise margin. .. .We favor shares of American Eagle over the long term even more now, given our preference for shares of domestic-focused retailers in the time of a strong dollar – as bright U.S. prospects fuel stateside spending in discretionary, and shares attract investors overseas seeking high dollar-denominated returns. Although we continue to remain bullish on American Eagle over the long term, we now have less conviction in runway for shares as we approach our price target in what we view as an increasingly volatile retail environment, until investor visibility into a US-China trade settlement improves, and are stepping to the sidelines for now.”
Bank of America – Duke Realty, downgraded to neutral from buy
“Uncertain path to China trade war resolution. Recent tariff announcements and threats from both the US and China suggest a bumpier road to a trade deal than previously expected. We remain positive on the secular trend in warehouse demand from e-commerce, the push to store goods closer to the consumer, and the governors on new supply in many markets. That said, warehouse demand is highly correlated with GDP growth and BofAML Economists would expect a drag on growth if a trade war escalates. As such, we remain Overweight Industrial within REITs* but are taking a slightly more cautious stance on the sector by downgrading DRE to Neutral.”
Morgan Stanley – China Southern Airlines, downgraded to equal-weight from overweight
“Given the recent re-escalation of trade tensions between the US and China, we see near-term risks to China airlines stocks from: 1) the dip in RMB/USD exchange rate; 2) negative reaction in overall market, which will affect hit high-beta stocks, such as airlines, in particular; 3) potential demand impact if trade tensions continue.”
Wolfe Research – Melco Resorts & Entertainment, downgraded to peer perform from outperform
“We downgrade shares of MLCO for four key reasons: 1) the stock has rallied meaningfully off its lows and the multiple has recovered to near historical levels, 2) prior consensus estimates seem aggressive to us, 3) the macro looks increasingly dicey with re-emerging trade war rhetoric and recent stimulus from China may be short lived per reports, 4) the Morpheus ramp is taking longer than we expected and today’s call didn’t have enough answers to give us confidence.”