Following three years of stagnation, profits in corporate America are on the rise again – we expect a 12% profit increase for both 2017 and 2018
The “Trump rally” is well underway. The S&P 500 has increased by 8% since polling day in November
(DAX: +11%). This rally has been sustained by the recovery in values recorded in the financial, energy and industrial sectors. Here, fundamental data has improved significantly, so that the increase seems justified at the moment. In this way, (U.S.) financial figures are benefitting from substantial yield rises in the USA (+60 basis points for 10Y U.S. Treasury bonds since November), while energy bonds are also returning higher profits thanks to the sharp rise in the price of oil (+25% since Trump’s election win). Given that business is continuing to run smoothly in the third key U.S. sector (technology), Trump’s inauguration is set to coincide with significant profit increases for U.S. corporations.
Following three years of stagnating corporate profits we are expecting that profit dynamics will improve substantially on the S&P 500 during 2017 and 2018. This is essentially due to the rise in the price of oil over the course of the previous quarters, even if this may be easily forgotten. We anticipate that U.S. companies will record a profit increase of 12% this year. In addition, we expect a profit increase of 8% for the recently concluded Q4 2016, for which U.S. companies will issue reports for the first time in around two weeks (Aloca begins on 24 January). In the current first quarter, the profit dynamic may even hit 13% growth. This development should be sustained across the quarters to follow. An additional boost will come into play during 2018, when the majority of Trump’s planned tax cuts and public spending increases should take effect, raising economic growth in the USA to 2.8%. We believe that this positive scenario has not yet been fully incorporated into analysts’ forecasts for 2018.
The U.S. bond market is in desperate need of significant profit increases. After all, the valuation of the world’s most important stock market is very high. The S&P 500 has a price-earnings ratio 2017e of 17.2. This is 18% higher than the average across the last decade. A relative comparison to the bond market also reveals that the appeal of U.S. securities is diminishing: the earnings yield (inverse PER of 17.2, i.e. 5.8%) for U.S. dividend papers is currently only 3.4 percentage points above the yield of 10Y Treasury bonds. This corresponds to the lowest value for several years. The dividend yield for the S&P 500 (2.1%) is also lower than the yields offered by 10Y papers (2.4%).
While Barack Obama had to contend with the weakest stock market environment since the crash of 1973/74 when he was inaugurated in early 2009, President Trump will receive significant tail wind in terms of the profit development for U.S. companies. Trump does not deserve any credit for this; it comes much more as a consequence of rising oil prices and interest rates.
In our general forecast, we expect that the majority of gains on the stock market in 2017 will be made during the early months of the year. The U.S. stock market could make further gains from 20 January onward, when Trump is officially inaugurated as President. Mood indicators reveal that the euphoria has been reigned in to a large extent in recent weeks, meaning that there is now scope for further stock market gains.
We recommend remaining active and watchful due to the high momentum observed on the U.S. stock market. Hedging against surprising (Twitter-related) events would appear to make sense, after all the potentially sensitive issues (China policy, North Korea, protectionism, etc.) still require clarification.
Politically induced upturns on the stock markets are seldom sustainable. As soon as the positive expectations surrounding the inauguration of Donald Trump subside and a degree of normality returns to Capitol Hill, the U.S. stock market should develop a little more conservatively. Should in the meantime corporate profits actually increase noticeably, this would in turn qualify the high rating of the S&P 500 etc.