With Q1 2017 corporate earnings season pretty much done, both earnings and revenue growth numbers have been impressive. Earnings per share (EPS) growth of 14.9% was the highest growth rate since Q3 2011. The revenue growth rate came in at 7.8 percent, marking the highest year-over-year growth reported by S&P 500 companies since the fourth quarter of 2011, according to FactSet. Forecasters are now projecting 8-10 percent earnings and revenue growth in sequential quarters for the rest of the year.
With low unemployment, low interest rates, and a strong housing market, financial markets have embraced the strong earnings reports driving up the indices to all time highs. The Shiller S&P 500 cyclical-adjusted price-to-earnings ratio (CAPE) which is based on average inflation adjusted earnings from the previous 10 years is now at 29x versus its average of 17x. These high valuations suggest that even a few small hiccups could precipitate an immediate and painful correction.
These hiccups are likely to come, not from companies but, from the White House. If the past two weeks is any indication, Trump’s unpredictable, nonchalantly callous behavior with handling classified information or firing senior officials is only going to get worse when he heads over for his first foreign visit next week. In the meantime, Congress has ground to a halt, dealing daily with every new crisis created by the President and consequently, all the key bills related to health care, tax and infrastructure reforms have been languishing. When the markets sense that none of these reforms, especially tax reform, is not going to happen this year, bloodbath on Wall Street is sure to follow.
Future Wealth’s View
Given that this Presidency has become an embarrassment, the uncomfortable silences that follow after every tweet from the President suggest that Trump train could be careening toward an unmitigated disaster. It’s hard not to wonder where this Presidency will go next. With narcissism, disagreeableness, grandiosity being hallmarks of our current president rather than character, integrity, ideology, leadership and pragmatism, financial markets are clearly on edge. All hopes of a sensible presidency has been wiped away the first 100 days and it is all fun and good late night comedy fodder as long as the stock market continues to edge higher. Until, the bottom falls out and markets slip into a prolonged correction.
It is unfortunate that the actions of the White House has hijacked the financial markets even as corporate earnings and the global economy are showing signs of increasing strength. When the President’s twitter account lights up again with another careless blunder of increasingly disastrous proportions, one would be wise to bite their tongue and stay calm. Alternative facts from the White House will not end anytime soon but we hope the economy and markets will remain resilient.