Taxes got the attention last week, but it was the alchemy of earnings and elections that spurred stocks to their best week in months.
The week got off to a rocking start, with the Dow leaping 216 points on Monday following the relatively benign results in the French presidential election—benign because only one radical anti-European candidate made it through to the second round. That, says Marketfield Asset Management CEO Michael Shaoul, allowed the market to capture gains that probably would have come earlier if it weren’t for the risk that something really bad would happen. “In a world without the French elections, we would be where we are today, just more smoothly,” Shaoul says.
But the good news didn’t stop there, as corporate earnings continued to shine. It wasn’t just that companies like McDonald’s (ticker: MCD) and Ingersoll-Rand (IR) have been reporting better-than-expected profits, but that guidance is better as well. Bank of America Merrill Lynch strategist Dan Suzuki notes that for a second month in a row more companies have offered above-consensus guidance than disappointing forecasts; historically, the reverse has been true. Still, it wasn’t that the week was without its downers. Donald Trump’s tax plan lacked details, and failed to get the market moving, while first-quarter gross domestic product data was even worse than expected: The U.S. economy grew just 0.7%, below economist forecasts of 1%. In a note to clients, Strategas Research Partners’ Daniel Clifton called the sluggish growth “the U.S. economy’s warning shot to the Republicans,” who need to move past the infighting that scuttled health-care reform and pass their tax plan if they hope to get the economy growing at a rate faster than 2%—and retain their majority in Congress. “If the squabbling continues, growth remains restrained, and, in a lower voter turnout midterm election, the Republican majority will be lost,” Clifton explains.
If Republicans can push something through, it will probably mean a further boost for corporate earnings, especially if the border-adjusted tax remains sidelined. That could ultimately make all the difference for a bull market that’s already long in the tooth. “If you’re buying the market here at the highs, you have to be confident that you get almost everything that’s been promised,” says Ian Winer, head of equities at Wedbush Securities.
Or at least almost everything.
Source: Barrons Online