The S&P 500 remains at its highs, on the heels of solid earnings growth and economic activity, as well as the potential for tax cuts. Today, the House Ways and Means Committee released its tax bill, which will now go to the Senate Finance Committee. Some of the details include: a 20% corporate tax rate with no phase-in, a 25% pass-through income rate, a 12% tax on repatriated cash-equivalent foreign earnings, three new individual tax brackets (12%, 25%, and 35%- wealthiest still at 39.6%), eliminates SALT and AMT, mortgage interest deduction capped at $500K, and no changes to 401(k) deductions. The details are expected to be debated, and investors should continue to monitor the bill’s legislative process.
On the monetary policy front, the Fed elected to hold rates at 1.00-1.25% this week as expected. The market implied probability of another Fed rate hike at the FOMC Meeting is now up 92%. Also, Fed Governor Jerome Powell was nominated as the next Fed chairman today. While considered slightly more hawkish than Janet Yellen, he is viewed less so than some of the other candidates. Headlines also suggest that the market views him positively due to expectations of continuity, as well as his business background (which could support financial deregulation).
3Q17 earnings season is now 76% of the way over, as 388 companies in the S&P 500 have reported results thus far. In aggregate, S&P 500 earnings growth has been reported at 7.23% on sales growth of 6.37%. This has brought up full quarter estimated earnings growth to 5.57% (and 8.0% excluding the hurricane-affected insurance subsector) on sales growth of 5.70%. The Technology sector has led the way, growing earnings by 20.23% so far, above expectations of 8.36% at the end of June. Looking forward, full year 2017 S&P 500 earnings estimates have ticked higher, continuing their stable revision trend experienced in 2017 and remaining a tailwind to equities.
Technical: Since the S&P 500 broke out to new highs on September 11, the index has only closed below its 9 day moving average (DMA) four times and has only traded below its 20 DMA on one day. Furthermore, the ~6.7% increase in the market from August’s lows surprisingly took place through the seasonally weakest period of the year. With historically low volatility, low interest rates and inflation, solid earnings and economic activity, as well as the potential for tax cuts, we would suggest continuing to use any potential pullbacks as buying opportunities.
Healthy data is still flowing in. October ISM Manufacturing was below consensus and down from September’s reading, but remains very strong. On the jobs front, October ADP Employment Change was well above expectations, and initial jobless claims remain very low, suggesting continued employment strength. Tomorrow, October nonfarm payrolls are reported and consensus expectations are looking for a 312k increase, following September’s hurricane- affected -33k decrease. Furthermore, 3Q GDP of 3.0% was supported by stronger productivity, while labor costs ticked higher.
Economic data reported in the past week (actual vs estimate):
Unit Labor Costs (3Q P): 0.5% vs 0.4%, 0.3% prior
Non-manufacturing PMI (Oct): 54.3 vs 55.4 prior
Disclaimers and Disclosures
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