BMO expects a trade war 'surprise' to the upside that the market isn't prepared for

Key Points
  • BMO's Brian Belski says the market may be in for an unexpected move higher.
  • People are so negative about President Trump and the tariff situation that there will be some sort of surprise and the market is not prepared for it, he says.
Markets should see ‘Santa Claus’ rally before year end, BMO’s Brian Belski

The stock market may be in for an unexpected move higher, strategist Brian Belski told CNBC on Tuesday.

"People are so negatively disposed with respect to President Trump and the tariff situation that we believe that there's going to be some sort of surprise and the market is not prepared for it," the chief investment strategist at BMO Capital Markets told CNBC's "Power Lunch."

Stocks have traded lower on trade war fears, only to change course when positive news comes out.

U.S. equities initially dropped on Tuesday on comments from President Donald Trump that cast doubt on a trade deal being struck between the U.S. and China. The president told The Wall Street Journal on Monday that it is "highly unlikely" the U.S. would delay increasing tariffs on $200 billion in Chinese goods. Trump also suggested the U.S. could impose a 10 percent levy on iPhones and Apple laptops imported from China.

However, on Tuesday afternoon, top White House economic advisor Larry Kudlow said the Trump administration has restarted talks with the Chinese government "at all levels." That caused stocks to edge higher.

Belski, who called himself "unabashedly bullish," said his reasoning is just common sense since Trump is following the same script he has used during past negotiations.

Both Trump and Chinese President Xi Jinping will be among the world leaders participating in this week's G-20 summit and are expected to meet on the sidelines.

Belski said that while the "tariff tantrum" may be causing some people to start talking about a recession in 2019 into 2020, he thinks that is way too early.

BMO's base case for next year has the hitting 3,150. Its bull case predicts the index can hit 3,400 if there is stronger-than-expected economic growth.

Belski is also expecting the market to rally into the end of this year.

"The stock market is a market of stocks, and there are great companies here in America that can be bought that will outperform the market," Belski said.

"That's how we're going to be positioning into the Santa Claus rally, which we believe will happen," he added.

A so-called Santa Claus rally typically occurs the last week of December through the first two trading days of January.

— CNBC's Fred Imbert contributed to this report.