- Weekly market focus
- Trump’s tax plan is awaited as opposition builds to border tax
- Yellen likely to remain noncommittal in this week’s Congressional testimony
- Favorable Q4 earnings season starts to wind down
Weekly market focus — The markets this week will focus on (1) Fed Chair Yellen’s semi-annual testimony to Congressional committees on Tuesday and Wednesday where the markets will be looking for the outside chance that she will provide new hints on when the Fed will next raise interest rates, (2) any further details on the Trump/Republican tax and infrastructure agenda, (3) a busy slate of U.S. economic reports, and (4) Q4 earnings season with 48 of the S&P 500 companies scheduled to report. Treasury Secretary nominee Steven Mnuchin is expected to be confirmed by the Senate today.
Trump’s tax plan is awaited as opposition builds to border tax — The stock market rallied sharply last Thursday when President Trump said he has a “phenomenal” tax plan that will be released in 2-3 weeks. That announcement was a surprise for Congressional Republicans who did not know that the Trump administration was working on its own tax plan. By all accounts, Gary Cohn, current National Economic Council director and former Goldman Sachs president and COO, is leading the Trump administration’s effort to develop a tax plan. He has been consulting closely with House Republicans.
The odds are high that the Trump plan is close to the House Republicans’ plan, which includes a cut in the corporate tax rate to 20% from 35%, a low 8.75% tax on the deemed repatriation of the $2.6 trillion in U.S. corporate profits that are parked overseas, a border adjustment tax plan with a 20% tax on imports, dropping the deductibility of interest, and allowing the immediate expensing of capital equipment, among other items.
Republicans plan to push the corporate tax plan through Congress using the reconciliation process, which eliminates the ability of Senate Democrats to filibuster. However, getting the border adjustment tax system through the Senate will not be easy given the strong opposition to the plan that has developed from U.S. industries such as retailers, auto companies, and oil companies that depend heavily on imported products and components. Republican leaders pushing the plan can afford to lose only 3 Republican Senators and several Senators have already expressed skepticism about the measure.
Senator David Perdue (R-GA) last week sent a letter to his fellow Senators urging them to reject the border adjustment tax. He said, “This 20% tax on all imports is regressive, hammers consumers, and shuts down economic growth.” He also noted that strength in the dollar resulting from the plan would “lower the value of U.S. investors’ foreign investments.” If Republican leaders cannot push through the border adjustment tax, then it is unlikely they will be able to cut the corporate tax to as low as 20%.
Yellen likely to remain noncommittal in this week’s Congressional testimony — Fed Chair Yellen on Tuesday and Wednesday will deliver her semi-annual testimony on monetary policy to Senate and House committees. There is a possibility that Ms. Yellen this week might step up her hawkish language and effectively say that the next March 14-15 FOMC meeting is “live” for a rate hike decision, just as Philadelphia Fed President Patrick Harper did last week.
However, we look for Ms. Yellen to remain noncommittal about the timing of the Fed’s next rate hike, particularly since there is no point in saying something that is gratuitously bullish for the dollar and risk antagonizing President Trump. The Fed at present is best advised to lay low and wait to see what happens next in Washington. The Republican fiscal agenda has been slow to emerge and in our view March will be too soon for the Fed to take any preemptive action with a rate hike.
The latest set of Fed dots released in December indicated that the Fed expects to raise interest rates three times this year. On that schedule, the Fed would need to get going with a rate hike at either the March or May meetings. However, the market is looking for only two rate hikes in 2017, the first by May/June and the second by November/December. The market is discounting a 28% chance of a rate hike at the next FOMC meeting on March 14-15, a 78% chance of a rate hike at the May 2-3 meeting, and a 100% chance of a rate hike by June.
Favorable Q4 earnings season starts to wind down — Q4 earnings season is winding down with only 48 of the S&P 500 companies scheduled to report this week. Notable reports include Agilent and AIG on Tuesday; Cisco, PepsiCo, and Marathon Oil on Wednesday; and Duke Energy, Waste Management, and PG&E on Thursday.
The market consensus is for Q4 SPX earnings growth of +8.4% y/y, up from expectations of +6.8% y/y of just two weeks ago, according to surveys by Thomson I/B/E/S. Q4 earnings have so far been positive with 68.3% of the 357 reporting SPX companies having beaten earnings expectations, mildly above the long-term average of 64.0% but below the 4-quarter average of 71%. Regarding revenue, only 48.3% of reporting SPX companies have beaten revenue expectations, below the long-term average of 59% and the 4-quarter average of 51%.
Looking ahead, the market is expecting a sharp pickup in earnings growth in 2017 with growth of +10.8% in Q1, +10.2% in Q2, +9.3% in Q3, and +12.1% in Q4. On a calendar year basis, the market consensus is for an improvement in SPX earnings growth to +10.8% in 2017 from the paltry growth rates seen in the last two years (i.e., +0.2% in 2015 and +1.5% in 2016). SPX earnings growth just turned positive again in the second half of 2016 after the earnings recession seen from mid-2015 through mid-2016.
Weekly market focus — The markets this week will focus on (1) Fed Chair Yellen’s semi-annual testimony to Congressional committees on Tuesday and Wednesday where the markets will be looking for the outside chance that she will provide new hints on when the Fed will next raise interest rates, (2) any further details on the Trump/Republican tax and infrastructure agenda, (3) a busy slate of U.S. economic reports, and (4) Q4 earnings season with 48 of the S&P 500 companies scheduled to report. Treasury Secretary nominee Steven Mnuchin is expected to be confirmed by the Senate today.
Trump’s tax plan is awaited as opposition builds to border tax — The stock market rallied sharply last Thursday when President Trump said he has a “phenomenal” tax plan that will be released in 2-3 weeks. That announcement was a surprise for Congressional Republicans who did not know that the Trump administration was working on its own tax plan. By all accounts, Gary Cohn, current National Economic Council director and former Goldman Sachs president and COO, is leading the Trump administration’s effort to develop a tax plan. He has been consulting closely with House Republicans.
The odds are high that the Trump plan is close to the House Republicans’ plan, which includes a cut in the corporate tax rate to 20% from 35%, a low 8.75% tax on the deemed repatriation of the $2.6 trillion in U.S. corporate profits that are parked overseas, a border adjustment tax plan with a 20% tax on imports, dropping the deductibility of interest, and allowing the immediate expensing of capital equipment, among other items.
Republicans plan to push the corporate tax plan through Congress using the reconciliation process, which eliminates the ability of Senate Democrats to filibuster. However, getting the border adjustment tax system through the Senate will not be easy given the strong opposition to the plan that has developed from U.S. industries such as retailers, auto companies, and oil companies that depend heavily on imported products and components. Republican leaders pushing the plan can afford to lose only 3 Republican Senators and several Senators have already expressed skepticism about the measure.
Senator David Perdue (R-GA) last week sent a letter to his fellow Senators urging them to reject the border adjustment tax. He said, “This 20% tax on all imports is regressive, hammers consumers, and shuts down economic growth.” He also noted that strength in the dollar resulting from the plan would “lower the value of U.S. investors’ foreign investments.” If Republican leaders cannot push through the border adjustment tax, then it is unlikely they will be able to cut the corporate tax to as low as 20%.
Yellen likely to remain noncommittal in this week’s Congressional testimony — Fed Chair Yellen on Tuesday and Wednesday will deliver her semi-annual testimony on monetary policy to Senate and House committees. There is a possibility that Ms. Yellen this week might step up her hawkish language and effectively say that the next March 14-15 FOMC meeting is “live” for a rate hike decision, just as Philadelphia Fed President Patrick Harper did last week.
However, we look for Ms. Yellen to remain noncommittal about the timing of the Fed’s next rate hike, particularly since there is no point in saying something that is gratuitously bullish for the dollar and risk antagonizing President Trump. The Fed at present is best advised to lay low and wait to see what happens next in Washington. The Republican fiscal agenda has been slow to emerge and in our view March will be too soon for the Fed to take any preemptive action with a rate hike.
The latest set of Fed dots released in December indicated that the Fed expects to raise interest rates three times this year. On that schedule, the Fed would need to get going with a rate hike at either the March or May meetings. However, the market is looking for only two rate hikes in 2017, the first by May/June and the second by November/December. The market is discounting a 28% chance of a rate hike at the next FOMC meeting on March 14-15, a 78% chance of a rate hike at the May 2-3 meeting, and a 100% chance of a rate hike by June.
Favorable Q4 earnings season starts to wind down — Q4 earnings season is winding down with only 48 of the S&P 500 companies scheduled to report this week. Notable reports include Agilent and AIG on Tuesday; Cisco, PepsiCo, and Marathon Oil on Wednesday; and Duke Energy, Waste Management, and PG&E on Thursday.
The market consensus is for Q4 SPX earnings growth of +8.4% y/y, up from expectations of +6.8% y/y of just two weeks ago, according to surveys by Thomson I/B/E/S. Q4 earnings have so far been positive with 68.3% of the 357 reporting SPX companies having beaten earnings expectations, mildly above the long-term average of 64.0% but below the 4-quarter average of 71%. Regarding revenue, only 48.3% of reporting SPX companies have beaten revenue expectations, below the long-term average of 59% and the 4-quarter average of 51%.
Looking ahead, the market is expecting a sharp pickup in earnings growth in 2017 with growth of +10.8% in Q1, +10.2% in Q2, +9.3% in Q3, and +12.1% in Q4. On a calendar year basis, the market consensus is for an improvement in SPX earnings growth to +10.8% in 2017 from the paltry growth rates seen in the last two years (i.e., +0.2% in 2015 and +1.5% in 2016). SPX earnings growth just turned positive again in the second half of 2016 after the earnings recession seen from mid-2015 through mid-2016.