Investors remain calm as equity prices move higher against a backdrop of very low volatility...
Investor attention remained focused on Washington, D.C. last week. The Senate passed a budget resolution, while President Trump is set to announce who he will select as the next head of the Federal Reserve. These factors, combined with ongoing solid economic data, allowed the so-called reflation trade to continue as higher-risk financial assets gained ground. U.S. equities notched their sixth consecutive week of gains...
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Key Points:
- Equities enjoyed their sixth week of gains, as higher-risk areas of the financial market continue to outperform
- Tax reform would likely provide additional upside for stocks.
- One risk we are watching is the possibility of a spike in Treasury yields that could disrupt the stock market.
Earnings remain a solid tailwind for equity prices. Just over 20% of S&P 500 companies have announced third quarter results. Earnings are beating expectations by 4.5% and revenues by 1.0%. This compares to the long-term historical average of 4.7% and 0.3%, respectively. Earnings per share are on track to rise 8% for the quarter.
The Fed’s balance sheet normalization should have a limited effect on equity markets. The Fed is not planning to alter the pace of normalization, which means the move is already priced into financial markets. Additionally, the relative size of the Fed’s quantitative easing purchases was relatively modest. The Fed’s asset purchases never exceeded net Treasury issuance, while the Bank of Japan’s QE program was three times government bond issuance and the European Central Bank’s was seven times issuance. As a result, the wind-down from the BOJ and ECB may have more influence on financial markets.
Regulatory changes from Washington should continue to support equities around the margins. Although President Trump’s legislative agenda has faltered, he has made progress on reducing regulations and lowering regulatory enforcement. These actions have generally been equity-friendly, especially for the energy and financial sectors.
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