Trade War Escalates. Stock Markets Shrug. Here’s Why.

Investors tuned out the latest escalation in the trade war between the world’s two largest economies, with markets around the world climbing slightly as President Donald Trump announced new tariffs on China and Beijing responded in kind.

Stock markets in Japan, Germany and South Korea — where many companies’ fortunes hinge on international trade — were all up. Even in China, where major equities markets had been down about 20 percent this year, the benchmark index in Shanghai closed almost 2 percent higher.

In the United States, the S&P 500 rose more than 0.5 percent, as investors continued to see few signs that American companies would be hurt by Chinese attempts to retaliate against Trump’s confrontational stance on trade. In the latest tit-for-tat, the president said Monday that the United States was imposing tariffs on another $200 billion in Chinese imports, and China responded by saying it was adding tariffs on $60 billion in U.S. goods.

Why are markets so sanguine about a trade war that could affect hundreds of billions of dollars in international commerce?

One reason is that corporate profits in the United States have been booming — they were up more than 20 percent in the first two quarters of the year, compared to last year — thanks to the Trump administration’s tax cuts and a strong domestic economy. That makes an intensifying trade war much less scary.

“I think the bottom line is that the earnings have continued to accelerate,” said Marc Pouey, a strategist at Bank of America Merrill Lynch. “If the trade tension were to dissipate, it would help sentiment, but this market is being held up by fundamentals, which are very good.”

Stock markets in the United States are beating their foreign counterparts. The Nasdaq index is up more than 15 percent this year. The S&P 500 is up 8.6 percent, even though the companies in the index generate about 38 percent of their sales outside the United States, according to the market data company FactSet.

By contrast, Japan’s Nikkei 225 is up only about 2.9 percent for the year, and France’s CAC-40 — one of the best-performing large European stock markets — had eked out a gain of less than 1 percent.

Some sectors of corporate America have lagged. Industrial companies in the S&P 500 — Boeing, Honeywell and 3M among them — are up only 4.7 percent for the year.

Such companies are especially vulnerable to trade disputes. They consume large amounts of products like steel and aluminum, whose prices have jumped because of the administration’s import tariffs. Some of these companies also do lots of business in China, where they may be subject to that country’s tariffs, a general economic slowdown because of the trade war or both.

“China, for sure, is impacting some of these stocks,” said Anik Sen, global head of equities at asset manager PineBridge Investments. “These are the ones that have actually borne the brunt of this uncertainty.”

Tariffs could knock 0.7 of a percentage point off China’s annual economic growth, said Fang Xinghai, vice chairman of China’s securities regulator. But, he added, the Chinese government has the tools to cushion any impact. Fang was speaking Tuesday at a World Economic Forum conference.

Some analysts worry that Beijing may retaliate against the United States by weakening the value of China’s currency, the renminbi, relative to the dollar. That would make Chinese products cheaper and more attractive to foreign buyers, potentially blunting the higher costs that U.S. tariffs would impose.

The renminbi has weakened by more than 7 percent against the dollar this year, an unusual slide for a currency that does not trade freely and is carefully managed by Beijing. The daily exchange rate is set by the Chinese central bank and trades in a narrow band against the dollar.

On Tuesday, the renminbi had lost a little more ground against the dollar.

One big question hovering over the markets is whether the trade war has reached a plateau or will escalate further.

Trump has long railed against what he says are China’s unfair trading practices, and even as he announced the latest round of tariffs Monday, he said he was willing to quickly add levies on an additional $267 billion worth of Chinese imports if Beijing retaliated.