Just when U.S. markets were exhibiting record highs, geopolitical uncertainty has increased, with potentially negative effects for corporate earnings.

While the bottom-up consensus of equity analysts is for global index earnings to grow more than 7% over the next year, “that will not happen if there is a trade war,” said National Bank in its monthly equities report.

The odds of a trade war are on the rise. U.S. president Trump started raising tariffs last July over complaints China steals or pressures companies to hand over technology. Most recently, the U.S. increased tariffs to 25% from 10% on $200 billion of Chinese goods, effective May 10.

In retaliation, China announced on Monday that tariff hikes of 5% to 25% will go ahead on $60 billion of U.S. goods, effective June 1, extending Chinese duty increases to $110 billion of imports from the U.S.

As a result of the tariffs, U.S. earnings growth would be constrained, because foreign sales account for 44% of total sector sales in the S&P 500, and well over 50% for the materials, energy and IT sectors, said the National Bank report.

Further, heightened geopolitical uncertainty has increased demand for U.S. dollars, a trend that could become another headwind for U.S. corporate earnings, it said.

While National Bank expects a trade deal will still happen, it has altered its asset allocation in response to rising geopolitical risk.

“We are reducing our overweight exposure to equities by taking some profits in emerging markets and EAFE [Europe, Australasia, Far East] — the geographical areas most exposed to global trade tensions,” the report said. For example, MSCI EM Asia is down more than 4% month to date.

“Proceeds are used to raise our cash position to 5% above benchmark,” the report said.

As trade negotiations continue, “we stand ready to act as events unfold,” it added.

For more details, including National Bank’s sector rotation, read the National Bank report.