After a holiday-shortened week in which stocks fell again, earnings will be in focus.
Last week, geopolitical, not economic, concerns dominated the headlines as only the major U.S. bank earnings out Thursday provided investors with market-moving headline data to key off.
In the week ahead, investors will have a fairly quiet economic data calendar, but earnings will begin heating up.
Reports expected this week include blue-chippers Netflix (NFLX), Bank of America (BAC), IBM (IBM), Qualcomm (QCOM), eBay (EBAY), and GE (GE). United Airlines (UAL), which has been in the news of late for all the wrong reasons, will also report earnings.
And while corporate earnings are top-of-mind for investors in all quarters, the first three months of 2017 will be of particular interest given that so many non-financial reasons (read: Trump’s economic agenda) for being bullish U.S. stocks have fizzled in the last month or so.
Couple this with high expectations — FactSet’s John Butters notes that first quarter earnings growth is forecast to hit 9% for the S&P 500 — and the potential for disappointment is high.
- Monday: Empire State manufacturing, April (15.0 expected; 16.4 previously)
- Tuesday: Housing starts, March (-3% expected; +3% previously); Building permits, March (+2.8% expected; -6.2% previously); Industrial production, March (+0.5% expected; +0% previously)
- Wednesday: Federal Reserve’s latest Beige Book
- Thursday: Initial jobless claims (234,000 previously); Philly Fed manufacturing, April (25.0 expected; 32.8 previously); Index of leading economic indicators, March (+0.2% expected; +0.6% previously)
- Friday: Markit flash manufacturing PMI, April (53.8 expected; 53.3 previously); Markit flash services PMI, April (53.6 expected; 52.8 previously); Existing home sales, March (+2% expected; -3.7% previously)
Trump flips on Yellen
During a week that saw the “mother of all bombs,” United’s customer service, and North Korea dominate the conversation, President Trump’s comments on the dollar and the future of Federal Reserve Chair Janet Yellen were the biggest story of the week.
In an interview with The Wall Street Journal published Wednesday, Trump said that Yellen was “not toast” when her term as Fed chair expires in February 2018, adding that, “I like [Yellen], I respect her… it’s very early.”
This is a huge reversal from Trump’s rhetoric during the campaign. In September 2016, Trump said, Yellen and the Fed were “obviously political,” and that rates were being kept low because it is what then-President Obama wanted from the central bank. “What they [the Fed] are doing is, I believe, it’s a false market. Money is essentially free,” Trump told The Wall Street Journal.
Trump also said that he likes low interest rates. Surprising for someone that spoke very negatively of the Fed during the campaign, but not surprising for someone who made billions borrowing money to finance big real estate projects.
And while politicians speaking against things they don’t like isn’t unique, Trump’s comments made clear to many that when Yellen’s time came at the Fed, a Trump administration would go another direction. Continuity at the Fed, then, would be an unexpected — and likely positive — development for markets which were otherwise bracing for regime change at the world’s most influential central bank.
Neil Dutta, an economist at Renaissance Macro, said that these comments from Trump indicated Gary Cohn, a Goldman Sachs alum and the president’s chief economic advisor, is moving into the driver’s seat on Trumponomics.
“Nationalism is giving way to pragmatism,” Dutta wrote. “I think the odds of Janet Yellen being here next year are rising and I do think that is bullish for risk appetite.”
So, good for stocks.
Elsewhere in this same interview, however, Trump said that the U.S. dollar was too strong — a strength Trump attributed to increased economic confidence that resulted from his election win.
David Zervos, a strategist at Jefferies, notes, however, that higher interest rates and a stronger dollar are precisely what is needed to put in place Trump’s stated economic goals.
This week’s “statements by Trump on his desire to keep interest rates low and the dollar weak are likely to end up being quite disingenuous (and yes, this would surely not be his first disingenuous statement),” Zervos wrote.
“For if Trump’s true goal is to generate higher real returns to private sector capital and higher potential growth rates via fiscal and (de)regulatory stimulus, then the side effects of a stronger dollar and higher rates should not be a big deal. The idea of having low rates, a weak dollar, and stronger growth is simply something out of fantasyland.”
An alternative read on Zervos’ assessment, however, is that the Trump agenda we came to know is no longer in play. And the more stories we read about how Trump strategist Steve Bannon — known, among other things, for his ardent support of economic nationalism inside the White House — is losing influence in the administration, the more likely this is.
In a note to clients this week, Ethan Harris and his team at Bank of America Merrill Lynch wrote a note about Trump’s tax reform plans titled “Plan B.” The tax reform we thought we would know is already dead.
For Harris and his team, this specific ‘Plan B’ would involve:
- Cutting the corporate marginal rate to about 25% so it matches other major countries.
- Taxing profits earned abroad at a lower rate (say 20%) regardless of whether it is brought home or not.
- Having a onetime repatriation tax of say 10% for existing profits held overseas.
Harris writes that, “Such a plan is far from perfect, but this ‘hybrid’ approach had support from both sides of the aisle before the election.”
These particulars are only partially important. A chart included by Harris in this note, however, makes a much stronger point about where tax reform is now and seems likely to be in the future.
Just a few months ago, nearly all investors were expecting comprehensive tax reform by year-end. Currently, investors are about split on seeing corporate and individual tax reform by year-end. A further downgrade of expectations on tax reform does not seem unlikely.
Tax reform was the most significant part of Trump’s agenda in terms of boosting growth in the near-term. It’s telling that tax reform is now being discussed as a slimmer package while things trade restrictions and infrastructure spending and healthcare reform seem all but dead.
This is simply not the new era of bold economic plans that many believed had been ushered in on January 20.
Markets, for their part, have by now discounted any action from the Trump administration this year. Whether consumers and businesses begin to do the same is now the most important place to focus.
On Citi’s (C) first quarter earnings calls, CEO Michael Corbat, said that when it comes to Trump’s more stimulative economic proposals — such as infrastructure spending and tax cuts — it’s not a matter of if, but when these changes take place.
This is fast becoming a contrarian view.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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