The biggest stock risk after Trump's victory is the trade war with China

• Trump's election victory sparked a rally in the S&P 500, but China-related risks loom.
• China could retaliate significantly against Trump's proposed 60% tariff, Capital Economics said.
• Technology is in danger as large-cap companies like Apple and Tesla manufacture and sell products in China.

The stock market zoomed higher since President-elect Donald Trump's victory last week, with the S&P 500 posting a quick 5% gain.

Yet even if Trump's victory opens the stock market to even greater upside potential, via tax cuts and deregulationit is also makes it more vulnerable to other risks.

According to Chief Market Economist John Higgins of Capital Economics, the biggest risk to the S&P 500 is China, and specifically its potential reaction to a new Trump trade war.

“Perhaps the biggest risk for the S&P 500, given that a bubble in the index has been inflated by hype around AI, would be a retaliatory crackdown by China on the operations of big companies American technology on its territory,” Higgins wrote in a statement released Monday. note.

During his election campaign, Trump proposed a 60% tariff on all goods imported from China, which would be a sharp increase from the 25% tariffs he had imposed on a list of products selected during its first administration.

If Trump's proposed 60% tariff against China passes and the country responds aggressively, it would likely put pressure on some of the largest U.S. companies, like Apple and Tesla, that make and sell their products in the country .

China can do everything from restricting the sale of goods by American companies within its territory to disrupting the manufacturing operations of American companies.

But Higgins says this is an unlikely outcome, as an escalation of the trade war would hit China's already struggling economy.

“Retaliation in this way would damage the image that China is trying to cultivate as a responsible superpower,” Higgins said, adding that if it responded too aggressively to a second round of Trump tariffs, it could losing access to technologies that are integral to AI. .

Instead, China would likely take a more targeted approach in response to a second round of tariffs from Trump.

“We suspect China would retaliate in more subtle ways, such as by limiting the supply of rare earth metals and older generation semiconductor chips,” Higgins said.