Since Donald Trump assumed the presidency last year, economic signals have been confusing, often contradictory.
In fact, even the president’s views on the economy have been confusing, said Ed Yardeni, president of Yardeni Research, in a webcast entitled “Predicting the Markets in Trump World” on Wednesday.
“Trump is a weird dude, you have to say that,” said Yardeni. “I don’t know any president that has been this bullish and this bearish for the stock market. He cuts taxes, that’s bullish, then in January he talks about tariffs on aluminum and steel.”
Almost halfway into 2018, markets and the economy have presented investors with a lot of noise related to trade and growth. Yardeni believes he’s found the signal that should presage the momentum of markets and the economy in the near term: positive earnings growth.
Notably, the S&P 500 earnings picture improved before the passage of Trump’s signature tax reform package in December, said Yardeni. Though some investors and analysts credit the president with creating an economic turnaround, Yardeni argues that the global economy was improving independent of his pro-business policies as it emerged from a “rolling recession” of flat revenue growth caused by a collapse in commodity prices.
“I am suggesting that we may continue to see an expansion with these rolling recessions along the way,” said Yardeni. “They moved through energy and commodities from 2014 to 2016. Lately, they’ve been rolling through retailing. That sector is moving to restructure and cut back capacity. That’s a rolling recession. We’ll see how technology disrupts other industries in the coming years. It may experience rolling recessions [itself].”
From a valuation standpoint, U.S. equities look more attractive, as forward-looking valuations have eased after analysts had to revise their estimates drastically upward in January due to the tax cut package.
Yet the market is discounting earnings, said Yardeni, because analysts tend to be optimistic during economic expansions and eventually revise their estimates lower. While a blended average of analyst estimates states that S&P 500 earnings will grow by 21 percent in 2018, Yardeni thinks that number will come down to 18 percent.
Valuations should continue to fluctuate to either side of 15x forward earnings, said Yardeni, which means the S&P 500 should cross the 3000 mark in the coming months.
Fourth quarter earnings calls were particularly upbeat due to the tax cuts, said Yardeni, while the recent conference calls for the first quarter of this year were “more subdued” due to trade concerns, he said, adding that those concerns amount mostly to noise.