Strategy: Trump Thump
Is President Donald Trump bullish or bearish for the stock market? In a little over a year into his first term, he has been both.
Since Election Day (November 8, 2016), the S&P 500/400/600 rose 34.3%, 31.8%, and 34.9% through January 26 of this year, when all three hit record highs (Fig. 15). The stock market was discounting a more pro-business White House with fewer regulations on doing business and possibly tax reform.
The Tax Cut and Jobs Act (TCJA) was enacted on December 22, 2017, and stock prices proceeded to melt up during January as analysts scrambled to raise their earnings estimates as a result of the cut in the statutory corporate tax rate from 35% to 21%.
The forward P/Es of the S&P 500/400/600 soared after Election Day through early 2017 but then meandered lower as investors lost confidence in the likelihood of tax reform. Their confidence rebounded during the second half of last year, and was rewarded with the passage of the TCJA.
The meltup during January of this year ended abruptly during February and March as Trump turned toward his America First protectionist agenda. As of this past Monday, the forward P/Es of the S&P 500/400/600 have fully retraced their “Trump bump” after Election Day, dropping to 15.9/16.0/16.9 (Fig. 16).
However, the post-TCJA bump in forward earnings remains intact (Fig. 17). In our opinion, the P/E correction has been overdone and may be over soon. Meanwhile, the outlook for earnings remains bullish. That’s as a result of the TCJA and solid global synchronized growth.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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