In the year since President Donald Trump's victory, the S&P 500 has enjoyed a nearly 24% total return – the fourth-best 12-month post-presidential election gain since the 1930s.
But the global improvement in inflation, growth, and earnings expectations suggests that Trump's pro-growth policy proposals – such as tax reform and deregulation – are only one small part of the picture. This is evidenced by the nearly universal breadth of risk-asset gains. For example, the MSCI All Country World ex-US index of international stocks is up nearly 26%, and high yield bonds have delivered a solid 9.2% total return.
- The UBS US Office of Public Policy estimates a 60% chance that tax relief will go through, but the economic impact is expected to be limited. Relatively flat consensus forecasts for US GDP growth – 2.1% for this year, 2.3% for next year, and 2.1% for 2019 – suggest muted market expectations.
- A corporate tax rate cut from 35% to 20% would provide close to a 10% boost to S&P 500 earnings, and even a reduction to 25% would provide a 6% lift. While tax reform would boost 2018 earnings per share (EPS) growth for the S&P 500 to 15%, we expect an 8% EPS increase even if Republican efforts fail.
Republican tax relief and deregulation efforts may provide an incremental boost to US earnings and economic growth. But improving global economic trends – not US politics – have been the primary driver of market gains. A solid fundamental backdrop remains the foundation of the current equity market rally. We continue to recommend an overweight to global equities.
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