Equities Advance Easily as Tax Debate Continues - Butler Financial, LTD
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Equities Advance Easily as Tax Debate Continues

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses earnings growth, technical trends, and the potential for tax reform.

October 31, 2017

To our surprise, equities have thus far navigated the often challenging seasonal period with ease. Starting September 28, the S&P 500 registered 12 new all-time high closing prices during a 21-day trading span. Solid economic readings, healthy company fundamental trends and political progress on potential tax reform/cuts have emboldened investors.

The tax details will now be debated as the Republicans rush to get something done before year-end. Differing opinions within the party on numerous issues such as SALT, interest expense, 401(k)s, impact on the “rich”, and how all these cuts will be paid for raise the odds some anxious moments may arise for investors between now and year-end. Given it is our belief something will eventually transpire on the tax front that will likely boost corporate earnings, any setback in stocks due to the debate process can be purchased, in our view.

During the rally, sectors with the best momentum year-to-date continued their relative strength. Technology, financials and materials continued their advance. Utilities also bounced slightly, as these four sectors’ stocks have outperformed the S&P 500 on their earnings reports this season. Telecom, energy, consumer staples and real estate showed the most relative strength deterioration – and remain the worst performing sectors over the past 12 months.

3Q earnings season is in full swing, as 54% of the S&P 500 has reported thus far. These companies have reported aggregate earnings growth of 8.1%, which has brought expectations for the full quarter up to 4.6%. Sales growth has also come in above expectations so far, with reported growth of 7.0% – bringing expectations for the full quarter up to 5.7%.

In sum: Earnings season has created volatility (and opportunities) at the sector and stock level. With valuation levels at post-credit crisis highs due to expectations of strong earnings growth and the potential for tax policy changes, the path of both will remain a significant influence on equity markets as we head into the end of the year. We maintain a cyclical bias to our sector allocation, due to our expectations of continued economic and fundamental momentum.

Opinions expressed are those of the author and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or any forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in the index.

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