A Modest Retreat and Upside Momentum Continues
The end of April has brought a modest retreat in “soft data" indicating more realism entering the market and a mid-month slight pullback in markets in general. We believe this taming of optimism is both healthy and more realistic. Economic data has been mixed; however, we continue to believe that the fuel for this bull market, entering its eighth year, will come from improving earnings. To date, 75% of S&P companies have beaten bottom-line earnings expectations. The companies beating estimates have mostly seen their stocks rewarded, but the few that have missed have been harshly punished.
In general, corporate leaders are cheering a more business-friendly environment. This heightened confidence should lead to more capital spending and longer-term investments by companies. The recent tax reform proposals were initially cheered by the market, but the reality of possible fierce opposition from Democrats and deficit-minded Republicans points to caution of a long road ahead and tempered enthusiasm. In addition, it seems, as noted above, with mixed economic data and soft inflation data, there seems little impetus for the Fed to move against the market.
It is worth noting that for all the excitement about repatriation of U.S. dollars held overseas (an estimated $2.5 trillion), the last time a “tax holiday" took place in 2004, most of the beneficiaries were skewered to a limited number of companies who in turn, plowed the money into dividends and share buybacks – good for the shareholders, but not in and of itself a means to spur economic growth or create more jobs.
On the global side, there have been four elections since Brexit where populists did worse than expected: Austria, Spain, Netherlands and now France. The outcome of these votes has favored establishment candidates, highlighting the fading political risk as global economic growth picks up and concerns over immigration recedes. The resulting improvement in Non-U.S. World and Emerging Market performance are a reflection of this global shift.