One year ago, Donald Trump beat Hillary Clinton to become the 45th US President. Stock markets globally reacted by falling – but only for a single afternoon. Subsequently what has become known as the Trump Bump kicked in, pushing US stocks higher on the promise of tax cuts, looser regulation and infrastructure spend.
The S&P 500 is at 2,590 today, up from 2,140 a year ago. Before Trump was elected many investors were calling out the record high index, saying it was due a correction. Today, naysayers continue their warnings – but the market seems unstoppable.
Nadia Grant, head of US equities at Columbia Threadneedle Investments says US equities have outperformed global equities since the end of the global financial crisis – and this rally could well continue.
“Seven years into the recovery and the economy is still growing at a muted but steady pace with no exuberance to derail its path,” she said. “Corporate earnings are now fuelled not only by a sound domestic backdrop, but also a synchronised global recovery fuelling demand for US goods internationally. With about 35% of earnings derived from overseas, the consensus therefore estimates US earnings will grow above 10% in 2017 and 2018.”
Witold Bahrke, senior macro strategist at Nordea Asset Management thinks it seems increasingly likely there will be some form of fiscal easing in the shape of tax cuts in the coming quarters – and that will be positive from a business cycle perspective. He predicts that this in turn could lead to higher wage growth, which could force the Fed to hike at least four times this year and next.
Will increased earnings and tax cuts lead to greater gains for shareholders of US stocks? Morningstar Investment Management’s Dan Kemp doesn’t think so. He believes there are better opportunities outside of the US.
“By looking under the hood, it has become increasingly obvious that valuation pressures are mounting in the US, with price growth that has far exceeded any reasonable estimate of fundamental growth,” said Kemp. “We find that better opportunities reside outside the US, although we must similarly remain conscious that over-trading in a noisy market can significantly reduce performance.”
AllianceBernstein’s Kurt Feuerman disagrees, saying that some short-term volatility may be in the cards, but low interest rates and better global economic growth support positive sentiment toward US stocks in the long run.
“Accelerating GDP growth around the world has removed one of the biggest headwinds for US stocks in recent years by weakening the US dollar, which had been exceptionally strong for several years. So, despite concerns around the Trump rally, we believe that stocks are more attractive than their raw valuations would imply,” he concludes.
Feuerman picks out banking stocks as one undervalued area, alongside stocks poised to benefit from tax reform such as multinationals with big offshore cash balances and companies with tax rates close to the 35% US statutory rate.
