November Market Insights

Election

As it currently stands, Republicans appear to be headed for a sweep of the Presidency, Senate, and House of Representatives.  Donald Trump was elected the 47^th President of the United States on Tuesday night and Republicans gained control of the Senate.  Though votes in House races are still being counted as of Wednesday afternoon, Republicans appear likely to retain control there as well.  Assuming that the House of Representatives outcome is as expected, there are several economic trends that are beginning to come into focus.    

With a unified Republican government, a full extension of the Tax Cuts and Jobs Act of 2017, which would otherwise expire at the end of 2025, is very probable.  This may also include a reinstatement of business investment incentives that have already expired.¹

Implementation of tariffs on imported goods from China and potentially certain sectors, such as automobiles, from the European market will also likely be implemented quickly after the inauguration.  While estimates vary, the market currently suggests these tariffs could land somewhere in the neighborhood of an additional 20% to 60% on imports from China. On the lower end of the spectrum, a 20% tariff on Chinese goods may push consumer prices up by approximately 0.30%.²  Should tariffs land at 60% on Chinese goods and 10% on goods from everywhere else, as was discussed during the campaign, current estimates expect a roughly 0.9% one-time increase in consumer prices.³  In essence, there may be an upward pressure on inflation at the outset of tariffs that should return to the underlying trend in the long-run. 

Expectations that the Trump administration will ease regulation on businesses have been a source of positive movement in the market.  Financials and small caps have seen the largest gains because of this.  Generally speaking, regulation affects small cap companies in an outsized manor and reducing regulation may give these companies room to grow.⁴   

Earnings Season

We are now fully in the throws of the third quarter earnings season.  Of the 70% of S&P 500 companies that have reported earnings so far, 75% have reported a positive surprise on earnings per share, equal to the ten-year average, and 60% have reported a positive surprise on revenue.  To date, the blended year over year earnings growth rate for the S&P 500 is 5.1% which, if it holds, would represent the 5^th straight quarter of year over year earnings growth.⁵  For small caps, as of October 31^st, 61% of Russell 2000 companies that already reported earnings surprised positively on EPS and 53% surprised positively on revenue.  Communications Services lead the way within the index, outpacing all other sectors in surprise factor.⁶  As we have previously discussed, growth appears to be broadening out within large cap companies.  Depicted in the graph below, non-Magnificent 7 companies have grown at the same rate as Magnificent 7 companies this earnings period.