The stock market popped on Thursday after a report from the Wall Street Journal suggested U.S. officials may lower tariffs on China during trade negotiations as an incentive to hatch a longer-term deal.

If a deal appears to be getting close, there is a possible game plan for traders.

“Any deal would likely see a relief rally as we believe markets have meaningfully priced in risks of trade tensions escalating,” said Ben Laidler, HSBC’s global equity strategist, in a note Tuesday. He also pointed out that tariff-sensitive stocks have underperformed significantly and their valuations are getting cheap.

To find the best names to buy on a trade deal pop, HSBC ran a screen looking for stocks with three main attributes:

  • Listed U.S. stocks with revenue exposure to China of more than 20 percent.
  • Underperformance during this three-month market pullback on trade deal concerns.
  • Cheap valuation on a forward price-earnings basis.

The names that came up were focused in tech including Skyworks Solutions, Broadcom, Micron Technology and Marvell Technology Group.

A resolution on trade between the world’s two biggest economies could be a big catalyst for a relief rally in the stock market. BlackRock Chairman and CEO Larry Fink said Wednesday on CNBC’s “Squawk Box” that there would be “a surge in investment sentiment” if both sides call off tariffs on each other’s goods.

Washington and Beijing reached a 90-day truce last month to halt any new levies as they seek to work up a long-term deal through negotiations. There has been mixed feedback on the trade talks — Sen. Chuck Grassley, R-Iowa, said recently that U.S. Trade Representative Robert Lighthizer saw no progress on key issues, while President Donald Trump tweeted about “big progress” with China. In the latest development, China’s vice premier, Liu He, has accepted an invitation to Washington this month for trade talks.

Fears of a full-on trade war with China have been on top of investors’ minds for months. The volatile stock market suffered its worst year since the financial crisis in 2018, with the S&P 500 tanking a whopping 14 percent in the fourth quarter. U.S. companies have also sounded alarms on the trade war’s impact on their business.

To be sure, this is lining up to be a risky binary trade. These names (and the whole market) could be hit hard if there is not a trade deal.

If the negotiations go nowhere and a 25 percent tariff is imposed on all Chinese goods, HSBC estimated 4.5 percentage points would be subtracted from 2019 earnings growth, more than halving the growth rate from current levels, Laidler said in the note.

Originally published at CNBC

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