Lyxor's Head of ETF strategy, Adam Laird, recently did a series of interviews with Investment Week editor Lawrence Gosling, focusing on President Donald Trump, US equity and the outlook for investors.
Alternative facts, illegal travel bans and the mother of all bombs...it's been a frenetic first 100 days for Donald Trump. No one could accuse him of taking it easy, having signed 15 executive orders and 13 presidential memoranda soon after his inauguration.
His campaign however was built on the promise of policies that would "make America great again", several of which are yet to materialise. In fact, he's been making America wait. It hasn't troubled the markets too much though. So what should we make of his first 100 days, and what's next?
Putting America first
Trump's intent to "put America first" led to his withdrawal from the Trans-Pacific Partnership trade agreement, his desire to renegotiate the North American Free Trade Agreement and his consideration of new tariffs and changes to border taxes.
He's also been trying to cut immigration, notably through his heavily criticised (and revised) travel ban. Details about his much-trumpeted wall along the border with Mexico remain scant.
This side of Trump's re-industrialization program was the most controversial and feared by markets. Tighter entry rules could have a detrimental effect on growth. And the OECD estimates that a 10% rise in the cost of trade could cut global GDP by around 1% per year.
What's more, protectionism and border controls could spur inflation, prompting monetary authorities to tighten policy at the expense of growth.
Style over substance?
$1 trillion of infrastructure spending was a key pledge, but details are notable by their absence so far. US infrastructure is creaking ever more loudly, but doubts are increasing whether this spending will ever materialise.
US infrastructure is ageing rapidly
Reducing the state's role in the economy by cutting taxes and red tape should support growth. Last week's announcement of "the biggest tax cut in US history" came with plenty of hyperbole but little clarity on how it would all be paid for. The Treasury Secretary repeatedly stated these reforms would "pay for themselves" through increased economic growth, but the market's reaction was subdued. Getting any plan that leads to a big increase in the budget deficit through Congress won't be easy.
However a meaningful economic package could be passed this summer. The positive effects of this fiscal push will however mainly be felt next year. There may then be a soft patch in 2019 as trade restrictions and monetary tightening start weighing on growth.
Buyers beware
The US stock market has surged in the 100 days since the inauguration. The S&P 500 has gained around 5% over this period, an increase well ahead of the average for a new Republican president. But the rally was mainly driven by multiple expansion, rather than earnings growth. US equities have looked expensive to us for some time, and they're only looking more expensive now. In fact, if you ignore the tech bubble, they are trading at historic highs.
Will earnings rise?
Earnings prospects have to improve for these valuations to be sustained. A lot depends on the exact nature of the economic package. The eventual repatriation of American companies' foreign earnings could provide a boost to earnings per share.
The upcoming tax bill is likely to have the biggest impact. If the legislation is passed in full, and is applied retrospectively, it could help US companies' 2017 earnings increase by around 11%. Depending on the timing and extent of the tax haul, the effect it could have on 2017 EPS could be from -1% to 9%. That's well below consensus estimates of 18% growth.
Markets might be too optimistic about US companies' prospects, even though they are still being supported by the Fed's dovish stance. That's not to say valuations won't inflate even further before earnings downgrades kick in - they haven't yet reached the overbought territory usually associated with an imminent fall.
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All data Lyxor Cross Asset Research team, April 2017. All opinions expressed are as at 28 April 2017. Past performance is no guide to future returns.
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