Late last week, JPMorgan’s strategist John Normand announced that the largest US bank “adopted a new baseline that assumes a US-China endgame involving 25% US tariffs on all Chinese goods in 2019” because “the US and China will not resolve their differences this year and that the Administration will make good on its threats to escalate.” Such a full-blown trade war “could take $8 off consensus 2019 EPS projections of $179 and reduce next year’s EPS growth from 10% to 5% year-on-year” with JPMorgan predicting that this could “potentially end the US stock market rally even assuming a forward multiple of 17, unless some other offset materializes.”

JPMorgan wasn’t finished, however, and around 2pm on Wednesday, JPMorgan took its “new baseline” call further when it announced that as a result of its new baseline assumption for a “full-blown trade war” next year between the world’s two largest economies, the bank downgraded its bullish call on Chinese stocks. Echoing what it said previously in the context of US stocks, JPMorgan strategists including Pedro Martins Junior, Rajiv Batra and Sanaya Tavaria wrote that the trade conflict will only escalate as the U.S. maxes out tariffs on Chinese imports, the dollar strengthens and the yuan weakens further.

JPMorgan became only the latest bank to downgrade Chinese stocks – which earlier in 2018 slumped into a bear market as a result of trade war fears and a sharp slowdown in China’s economy as a result of the crackdown on shadow credit – following similar moves by Morgan Stanley, Nomura and Jefferies earlier this year.

Curiously, while JPMorgan slashed its target and earnings estimates for the MSCI China Index which was already down 24% from its peak in January, the strategists still expect the gauge to rebound 8.9% from Wednesday’s close.

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