Futures Now

Investors are ignoring one of the biggest risks to the market, strategist says

Threats of a trade war could return to roil markets, says strategist

As earnings kick into high gear, investors have brushed the trade war threat to the background. That could be a mistake, says one strategist.

"What we know from experience is that most geopolitical risks don't impact markets materially over the longer term, but there's one exception to that rule, and it's protectionism," Kristina Hooper, chief global markets strategist at Invesco, told CNBC's "Futures Now" on Tuesday.

"While markets seem not to be concerned right now about any impending trade war, we have a lot to be worried about when it comes to that potential," she said.

The level of alarm over a potential trade war has been dialed back since Chinese President Xi Jinping's speech last week. Xi pledged to free up the Chinese economy to trade and foreign investment, both seen by some as a move to placate the U.S.

However, Hooper warns markets not to underestimate Xi's "strategic prowess." There's no compelling reason why China would grant material concessions and there could be another flare-up, she said.

Tensions between the U.S. and China have already ratcheted higher this week. On Tuesday, China said it would levy a 179 percent import fee on U.S. sorghum following an anti-dumping investigation. A day earlier, the U.S. Department of Commerce banned U.S. companies from selling to ZTE, a Chinese telecom that Qualcomm counts as a customer.

If fears of a full-blown trade war come back to terrorize markets, prepare for another steep sell-off, Hooper warned.

"I think we could see another sell-off of about 10 percent or a little less," she said. "There is a very real threat there."

Should tensions escalate, Wall Street could see an atypical trade war where tariffs are met with non-conventional methods from China.

"Keep in mind that China has an arsenal of tools in a possible trade war that are non-traditional," she said. "It doesn't have to be retaliatory tariffs. It could be devaluing renminbi. It could be in fact not buying more U.S. Treasurys or selling some U.S. Treasurys they currently hold, jacking up our borrowing costs. There's a lot at stake."

China held $1.18 trillion in holdings of U.S. bonds and other Treasurys as of February, according to the U.S. Treasury.

Uncertainty over geopolitical events has Hooper feeling cautious this year. She anticipates 2,800 on the by year-end.

"That may sound like I'm being pessimistic," said Hooper. "We could certainly go higher, but I think there's definitely a cap at about a 10 percent gain this year.

It's going to be "a lot harder to get our returns this year," she added. "We're going to have to put up with a lot more volatility and risk to get there."

A 2,800 target on the S&P 500 implies around 4.6 percent upside from current levels. Hooper's estimate is below the median target of 3,000 on the Street.

Earnings distract markets from geopolitical threats, but not forever, says strategist