Here’s How the Effects of the Trump Rally Might Play Out When The Earnings Season Begins

Posted by TLB Staff

U.S. stocks began a rally after Donald Trump pulled a surprising victory in the last U.S. presidential elections. In the buildup to the elections, the loudest media reports had claimed that a Trump victory would trigger a shocking wave of economic uncertainty that could lead to a massive crash in the stock market. Interestingly, U.S. equities have enjoyed an unexpected post-election market rally with the Dow Jones setting impressive new record highs.

For what it is worth, the S&P 500 booked 5.8% gains between Election Day and Inauguration day to mark the largest election-to-inauguration rally since 1996. The Trump rally from election to inauguration day also outpaces the performance of stocks in the similar periods for former presidents, Nixon, H.W Bush, Obama, W. Bush, and Roosevelt.

Of course, the post-election rally hasn’t been one smooth ride – there’s been pockets of increased bearishness in the markets at different times. Ron Welch, an analyst at Saxon Trade observes that “the Q1 earnings season is about to begin in earnest and earnings can provide clearer insight on how the Trump rally has actually affected U.S. equities.” Value investors will be especially interested in know if stock price gains have not outpaced earnings growth.

Here’s the overall analyst expectation for the Q1 earnings season

Data from FactSet indicates that analysts expect U.S. companies represented in the S&P 500 to post an overall earnings growth of 9.1% from the same period last year. The expected earnings growth will mark the highest earnings growth in U.S. stocks since Q4 2011.We will know if the forecast is spot on when heavyweights such as GE, Verizon, Wells Fargo, JPMorgan, and Citigroup start posting their earnings in the next couple of weeks.

You can also expect technology firms to make a significant impact in pushing earnings growth in Q1 2017. To start with, the tech sector in the S&P 500 has booked gains of 12% from January through March to outperform the general 4% gain in the S&P 500 in the same period.

Tech heavyweights such as Apple are expected to make a significant contribution the bullish earnings performance. The shares of Apple are already up 25% this year, analysts expect the firm to post earnings of $2.02 per share up from $1.90 in the same period last year. Of course, one of the main drivers of Apple’s bullish uptrend is the expectations that the upcoming iPhone 8 will reignite a frenzy in Apple’s cult-like fandom.

Analysts also expect the energy sector to contribute a decent quota to the expectations of a bullish earnings season. Global crude oil prices have been marking an uptrend since news about a potential OPEC deal to cut oil output broke. OPEC has gone ahead with the production cuts and commodities traders expect oil prices to start moving upwards as the summer driving season gets underway. A return to the prospects of increased profitability for energy companies will also provide the earnings season with bullish tailwinds.

All is well that ends well

The Trump rally contrasts with the fears that Trump will usher in a period of uncertainty in the U.S. economic landscape. The main driver of the Trump rally is the fact that Wall Street expects many of Trump’s proposed policy changes to be in the best interests of the economy. For instance, Trump has promised to cut taxes, reduce regulations, and renegotiate trade deals with an America-first policy in mind.

However, there are fears that Trump might not be able to actualize his lofty goals and the entire Trump rally might crash like a house of cards. The inability of the new administration to see its proposed republican health bill through congress reveals massive divisions along party lines and it suggests that Trump might not find it easy to work with congress to fulfill his promises.


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