Why the US Market Has Legs to Run Higher

When business mogul-turned-reality-TV-star Donald Trump won the US presidential election in November last year, markets took off, giving rise to a new phrase: ‘The Trump Trade’.

Markets got caught up in the election hype. That’s because Trump made lots of promises markets liked to get himself into the White House.

He swore he would take steps to protect local US industries against globalisation. Trump also promised he’d do away with Obamacare. And that he’d drastically reduce the corporate tax rate…and somehow spend US$1 trillion on infrastructure.

Four days into office, Trump pulled the US out of the Trans-Pacific Partnership (TPP) — a proposed multilateral trade deal between 11 countries, including Australia.

Despite promising to protect US jobs, there have been no tariffs slapped on US-made goods manufactured offshore. And Trump has yet to do anything on his ‘Ending Offshoring’ promise.

Eight months into his tenure, Trump has yet to deliver on any of his promises. Even though Obamacare is widely hated by Trump’s own Republican Party, he can’t seem to get the Republican healthcare plan beyond the Senate. In fact, they can’t even get enough support to take it to the floor for a vote.

Doctors, hospitals and the medical industry have savaged the Republican plan. The reason? If they support the Republican plan, millions of Americans would lose health insurance.

Tax reform — a key promise in Trump’s election campaign — was a vague press release issued in April this year. The US government made bold claims that they’d cut personal and corporate tax brackets, but the whole thing was scant on the details on how they’d go about it.

And that US$1 trillion in infrastructure spending? The opposition Democratic Party is all for spending government money on massive infrastructure projects. The Republicans, meanwhile, worry more about how to pay for such projects, and aren’t pushing to get it done. Chances are, the US$1 trillion infrastructure boost is stuck behind the repeal of Obamacare. In my view, you shouldn’t hold your breath waiting for anything to happen on this front.

Despite few election promises being kept, what happened to the Trump Trade?

The only thing coming out of the White House has been talks of in-fighting and key personnel losing their jobs. Yet the US market hasn’t fallen.

In fact, the Dow Jones Industrial Average has hit 35 new record highs this year, and may make a run at breaking through the 22,500-point barrier in the coming weeks.

Rather, chances are that the market has changed its focus. Instead of being concerned about Trump delivering on his promises, punters are looking elsewhere.

We now know the Trump Trade lasted from election day until early January this year. As the holidays ended and investors came back into the market, the focus moved to earnings season.

Recently I was discussing the effect of the Trump Trade against the earnings season with Phil Anderson, the real estate guru behind Cycles, Trends and Forecasts. He sent me this chart of the S&P 500 index:

S&P 500 Quarterly Earnings 2016-2017

Source: premiumdata.net
[Click to enlarge]

Phil highlights the honeymoon period of the Trump Trade in red. But he’s also indicated the last three earnings seasons in blue.

We know the Trump Trade began to lose steam in January. Nobody could agree on the issues of healthcare and tax reform. And plans for spending on infrastructure took a backseat.

Yet the US economy kept gathering strength, and some stocks have continued to make record highs. The Trump Trade kick-started the markets, but 2017 is a story of company profits driving shares higher.

As of 11 August this year, 454 companies in the S&P 500 index had reported earnings for the June quarter. Of these, Bloomberg reports that 68% have beaten analysts’ estimates for revenue and 78% have beaten earnings per share estimates.

Simply put, sales and profits are up. As wobbly as the US market looks to the outside world, it’s pretty hard to make the case for a US recession when companies are growing both sales and profits.

Bloomberg put together this handy graph to show analysts’ estimates for earnings within each sector:

S&P 500 Tech Sectors Beating or Meeting 2nd Quarter Profit Estimates

Source: Bloomberg
[Click to enlarge]

Unsurprisingly, the technology sector is expected to perform well in the upcoming earnings season. However, for US stocks to get the next leg up, profits are critical.

Take NASDAQ heavyweight Apple Inc. [NASDAQ:AAPL] as an example.

Apple Inc Quarterly Earnings 2016-2017

Source: premiumdata.net/Cycle, Trends and Forecasts
[Click to enlarge]

Apple’s earnings are marked in blue. As you can see, shortly after the financial data was reported, the share price took a huge leap higher.

In saying that, companies that missed expectations have been punished by the market.

Snap Inc. [NYSE:SNAP] is an example of this. Since listing on the New York Stock Exchange this year, it’s been nothing but a disappointment to investors.

Snap Inc Quarterly Earnings 2016-2017

Source: premiumdata.net
[Click to enlarge]

The red arrows show you where Snap released earnings — it’s share price was subsequently pushed lower as the market was unhappy with the results.

This was despite revenues growing by 153%, to US$181.7 million. The problem was that the market was expecting revenues of US$186 million. To boot, net losses were US$443 million, which was much higher than the expected US$380 million.

The point is this: Companies that fail to meet earnings expectations will see investors punish the stock price. Snap Inc. felt this when their share price declined 12.8% in the aftermath of a recent results release.

Given that the next US earnings season begins in a few weeks, we could be getting ready to see US markets soar even higher before the year is out.

It appears as though the US market isn’t done making new highs just yet.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money