The US stock market has been resilient to the political and policy firestorms created by the Trump White House. Trump’s failure to enact tax reform or a major fiscal stimulus has restrained but not destroyed the ‘animal spirits’ of the Wall Street bulls, even if the failure to ‘repeal and replace Obamacare’, a key campaign promise, could prove catastrophic for the Republicans in the 2018 Congressional elections.
The S&P is expensive relative to historical valuation ranges at 18 times forward earnings on the eve of the Federal Reserve’s shrinkage (‘normalization’ in Yellen speak!) of its $4.5 trillion balance sheet this autumn. However, its high valuations were anchored by 7% revenue and 14% earnings growth in the first quarter. It is highly likely that US companies will meet consensus earnings growth estimates of 8% for the second quarter. Volatility, while low now at 10, could well rise this autumn as US central bank begins monetary ‘normalization’ despite Dr Yellen’s dovish testimony to the Senate Banking Committee.
The most dramatic theme in the US stock market is a shift from growth/momentum (FANG, semiconductor and Internet shares) to value shares, primarily financials trading at modest multiples of tangible book value.
