Trade continues to be a tense topic between the U.S. and its key partners as well as for investors on Wall Street. The Dow Jones industrial average fell more than 200 points Thursday following the president's decision to include Canada, Mexico and the European Union in global steel and aluminum levies.
Since then, the countries have responded in kind, suggesting tariffs of their own against American exports such as pork, peanut butter and motorcycles.
Trump, who's repeatedly highlighted gains in the stock market under his tenure, could actually spur equities higher if he stemmed his tough talk, the J.P. Morgan team said.
Kolanovic, who heads J.P. Morgan's global quantitative and derivatives strategy, predicted the stock market correction earlier this year and highlighted complacency and high leverage in the market as warning signs. But in his Wednesday note, the strategist highlighted the impact of trade and protectionist ideology as "significant" market headwinds.
"A negotiation strategy that includes bluffing/threats can be successful in a two-party negotiation setup, but is more likely to deliver self-defeating results in a complex system such as global trade," he said. "The value destroyed by a trade war might be reversible if policies are reversed, while the positive impact of fiscal measures is likely to remain. This would likely catalyze a rough 4 percent market rally."
"However, if this uncertainty hangs over the market for a more extended period of time, the damage becomes more permanent and the probability of a disruptive tail event increases," he concluded. "Trade tensions continue to inflict damage to investor psychology and business confidence."
To be sure, Trump's battle for more balanced trade could end up helping the economy. The trade deficit appears to be on the decline, falling to a seven-month low in April, the Commerce Department reported Wednesday. The trade gap dropped 2.1 percent to $46.2 billion, the smallest since September.
If the trend continues, trade could contribute to gross domestic product in the second quarter, buoyed by strength in the manufacturing sector and consumer spending.