Profile image
By ETF Daily News (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

BlackRock: Trump’s Reforms Must Spur Earnings Growth, Or Rally Will Fizzle

Wednesday, January 11, 2017 6:01
% of readers think this story is Fact. Add your two cents.

(Before It's News)

From BlackRock: Investors have been bidding up stocks in anticipation of policy shifts by the new administration. Russ Koesterich discusses the policy that matters most to investors.

There is always uncertainty when a new administration takes office; this time more than most. Investors are faced with an unconventional candidate having won an improbable victory while promising an ambitious and somewhat fluid agenda. In addition, there is significant philosophical and policy space between the incoming administration and the more traditional wings of the Republican leadership in Congress.

All of this should lead to heightened uncertainty for investors, which, for now, they are ignoring as they bid stocks higher. The S&P 500 has rallied roughly 8% from the early November bottom. Value and small cap stocks have done even better, advancing 10% and 18%, respectively.

Although the rally can be partly explained by improving economic data, much of what investors are reacting to could be considered anticipatory. The market is looking forward to a combination of corporate tax cuts, a reduction in individual tax rates, fiscal stimulus and deregulation. But this is a lot, probably more than any administration can realistically achieve in one year.

Given these realities, what are the particular reforms that are likely to matter most for equity markets? From my perspective I would put corporate tax reform at the top of the market’s wish list. Here’s why:

1. Fiscal stimulus is probably going to be too small and protracted to have much impact.

Deficit hawks in Congress will want to keep any infrastructure spend modest. Practical realities dictate that any spending will also be lagged in its implementation and spread out over time. This will diminish the market impact outside of particular sectors and companies.

2. The market needs earnings growth.

U.S. equities are currently trading near the top end of their long-term valuation range, based on the price-to-earnings measure. Multiple expansion (in other words, paying more for each dollar of earnings) will be harder from here, particularly in an environment in which the Federal Reserve is tightening.

3. Corporate tax reform, therefore, is the market’s best chance of hitting earnings estimates.

The U.S. corporate sector exited a prolonged earnings recession in the third quarter of 2016, but that is no guarantee that earnings growth will meet expectations. 2017 estimates assume double digit growth, an aggressive target given already high margins and modest nominal economic growth. A reduction in corporate tax rates should close some of the gap between expectations and reality. While estimates vary, a reduction in the corporate tax rate from the current 35% to 20% would probably add approximately $5 to $7 per share to S&P 500 earnings in 2017.

Corporate tax reform is no panacea. Nor is it a win for everyone. Ancillary changes to deductions as well as a potential “border adjustment,” which would change tax treatment for both importers and exporters, will create losers as well as winners.

However, a sensible package of corporate tax reforms will improve U.S. corporate competitiveness. It will also provide a real-life tailwind, in the form of faster earnings growth, to a market increasingly driven by hope over experience.

The SPDR S&P 500 ETF Trust (NYSE:SPY) fell $0.11 (-0.05%) in premarket trading Wednesday. Year-to-date, SPY has gained 1.31%.

SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Large Cap Blend ETFs category.


Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

This article is brought to you courtesy of BlackRock.

You are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)



Source: http://etfdailynews.com/2017/01/11/blackrock-trumps-reforms-must-spur-earnings-growth-or-rally-will-fizzle/

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories
 

Featured

 

Top Global

 

Top Alternative

 

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.