Taking a stepped back view, it’s clear the early rally in stocks on Tuesday was just a sandcastle ready to crumble once the waves came in. Looking at the S&P 500 index,

87% of stocks retreated, with utilities, REITs, and staples getting hit. That was a reversal from last week when they played counterweight to the trade war theme. 

As I have written in my Streetwise columns, there are some definite cracks in the nation’s economic ice. Bloomberg recently made note of the fact that because of a down cycle in technology, earnings in the S&P 500 came very close to falling in the first quarter.

Now growth is forecast to be virtually zero for this quarter and next, and the last thing the financial markets needed was an exogenous trauma making it worse. However, that is what is currently happening.

Days after the Trump administration’s ban on Huawei Technologies, some chipmakers have slashed their sales forecasts, citing lost sales to the Chinese telecom giant. Meanwhile, Apple could face retaliation amid growing national sentiment in China.

While growth was never going to be robust this year, now it may be non-existent. Companies in the S&P 500 are expected to earn $167 a share this year, an increase of about $7 from 2018, according to consensus estimates.

In the case of a full-blown trade war, profits for the next 12 months could take a hit of $9 a share, sending the S&P 500 down to 2,550, JPMorgan estimates. Sanford C Bernstein & Co. says that a permanent increase in tariffs on Chinese goods would raise costs for American firms, shaving $4 to $8 from next year’s income.

Yet, despite three consecutive weeks of losses, the S&P 500 index has managed to hold the 2,800 level, sitting about 5% from its record high reached in April.

Companies might be able to pass on the extra costs to consumers by charging more. While a 25% tariff on Chinese imports would crimp S&P 500 earnings by as much as 6%, the lost income could be recovered through a 1% increase in prices, according to estimates by Goldman Sachs.

Meanwhile, Trump on Monday said he was “not yet ready” to make a deal with China, although he expected one could be reached in the future.

Consumer confidence rose in May as households grew more upbeat about the labor market, although the strong readings likely did not fully capture the impact of the trade standoff between Washington and Beijing.

The uncertainty has pushed investors toward safe-haven assets, which resulted in benchmark 10-year U.S. Treasury yields dropping to their lowest since October 2017, while the spread between the 10-year and 3-month bills narrowed to nearly a 12-year low.

The majority of the 11 S&P sectors were in the red, with only communication services on the plus side.

The S&P 500 index is now down nearly 5% from its closing high set on April 30, while the Dow Jones Industrial index declined for a fifth straight week on Friday, its longest weekly losing streak in eight years.

The tech sector, which is down 7.3% this month, also gave up early gains and turned negative despite a boost from a 4.72% jump in Total System Services Inc.

Advanced Micro Devices rose 9.80% after the company unveiled new chips to battle for market share with Intel, which fell 2.24%.

Among other stocks, Activision Blizzard Inc rose 2.86% after Goldman Sachs upgraded its shares to “buy” and said the videogame publisher would benefit from its recent releases.

FedEx Corp slipped 0.93% after Huawei Technologies said it is reviewing its relationship with the company after FedEx diverted two parcels destined for Huawei addresses in Asia to the United States.

Volume is expected to be light throughout the holiday shortened trading week. Approximately 6.67 billion shares changed hands on the major domestic equity exchanges on Tuesday, as compared to the 6.99 billion share daily average over the past 20 trading days.

Consumer Confidence Rises

Consumer confidence rose by more than expected to the highest level since November as Americans felt the best about current economic conditions in 18 years, highlighting the effects of a robust labor market and rising wages.

The Conference Board’s index climbed to 134.1 in May, according to data from the New York-based group Tuesday. The gauge of views on the present situation increased to 175.2, the highest since December 2000, while the expectations index rose to a six-month high of 106.6.

The broad-based gain in sentiment bodes well for consumer spending, which makes up the majority of GDP, amid unemployment near a five-decade low, sustained wage gains and more affordable mortgages. 

At the same time, trade continues to cloud the economic outlook, with Americans set to bear the cost of higher tariffs on Chinese goods that may weigh on sentiment in coming months.

The report is in line with other indicators showing elevated consumer confidence and follows data indicating the economy expanded by a more-than-expected 3.2% in the first quarter. 

The University of Michigan’s sentiment index also jumped to a 15-year high in May and the Bloomberg Consumer Comfort gauge remained near recent highs last week, driven by views on the buying climate.

“Consumers expect the economy to continue growing at a solid pace in the short term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement.

Respondents saying jobs are plentiful increased to 47.2 percent, while those who saw jobs as hard to get fell to 10.9 percent. That brought the labor differential — which measures the gap between those two measures — to the highest since 2000.

Buying plans for cars, homes and major appliances all increased, with the share of respondents planning a car purchase within six months climbing to a record in data going back to the 1960s.