Bullish Tone Persists as Tax Proposals Advance

Market Updates

Bullish Tone Persists as Tax Proposals Advance

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses quarterly earnings and the influence of political initiatives on the equity market.

November 28, 2017

The bullish tone remains in place for equities. Global economic growth is healthy, 3Q earnings surpassed expectations, and problematic headlines remain few and far between. The House has passed its tax proposal version, whereas the Senate will vote on their version this week. After that, the final debate will speed ahead as politicians attempt to reach passage before year-end. There are several potential stumbling blocks (ACA individual mandate removal, SALT, small business pass through, interest deduction, corporate rate, and timing of the cut) that could alter the timeline. Yet, with the Republicans desperately needing a “win” with the mid-term elections in 2018, we place high odds on something getting done.

Successful passage of legislation will supply another tailwind for the general equity market as we move through the seasonally strong year-end to early new year period. For this reason, we continue to expect pullbacks to be limited in number and degree.

Over the past 30 days, out-of-favor sectors (Consumer Discretion, Consumer Staples, Utilities, and Real Estate) joined Technology in leadership roles. We doubt the resurgence is a sustainable trend for the out-of-favor sectors, and we view the pullback in many of the cyclical sectors (Industrials, Materials, Energy, and Financials) as opportunity. Technology needs to consolidate gains garnered during another successful earnings reporting season.

Actual 3Q earnings followed the normal trend by producing over 6% growth (thus far) ahead of the approximate 3% expected growth as the quarter ended. Data suggests double-digit quarterly earnings growth should resume in 4Q, and the consensus forecasts double-digit gains for all of 2018. Even if actual results fall short of the current lofty projections (likely), solid mid-to-upper single-digit growth will be sufficient to keep the equity market on solid footing.

In sum, the equity market has strong underpinnings for now. For this reason, pullbacks should be limited and the path of least resistance remains higher. As details of the tax legislation are finalized, investor attention will turn to the potential impact the changes will have on earnings. Although we doubt passage will incentivize a sharp run higher in price for the S&P 500, we do feel lower taxes will serve as yet another positive catalyst for the equity market. In this environment, taking advantage of rotation at the sector level, such as that seen in the past 30 days, should boost overall portfolio performance.

Sources: FactSet, Raymond James Portfolio & Technical Strategy

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.

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