RoboStreet – March 8, 2017
Tough Tariff Talk Can’t Roil Teflon Market
Yesterday, President Trump laid out plans to enact tariffs on imported steel and aluminum that will take effect in two weeks. Canada and Mexico will be exempted indefinitely. From the White House press release:
“The Department of Commerce’s investigation found that the current level of aluminum and steel imports into the United States has the potential to threaten our national security. The United States is the world’s largest importer of steel, importing nearly four times as much as it exports. The United States imported five times as much primary aluminum as it produced in 2016.”
Heading into the announcement, the stock market was trading lower, but once the carve out of Canada and Mexico became known, buyers stepped in and took the S&P 500 up through its 50-day moving average- a key technical pivot point for the bullish camp to re-take and build on. There is tremendous leadership from the tech sector, which so happens to make up 23.78% of the S&P, far outweighing second place financials at 14.97% and third place healthcare at 13.78%.
Because earnings matter more to stock market momentum than any other variables, we should look for the market to chop around for the next two weeks as it has to digest employment data, tariff and trade issues, and the upcoming Fed FOMC meeting slated for March 20-21. A lot can- and probably will- happen between now and then to excite the market in both up and down directions. However, the way the tech sector is leading so strongly higher, I don’t see the market putting in a full retest of the February lows. There just seems to be too much interest in buying any and all pull backs.
Case in point is the powerful move in software stocks of late. The transformational shift to the cloud-based subscription model by the leading software companies is fueling a wave of accelerating revenue and earnings for companies like Salesforce, Adobe, Autodesk and Red Hat. The SPDR S&P Software & Services ETF (XSW) is in a strong bull trend that is forecasted to press much higher. Here is how it reads in my AI system:
My system has a six-month price target of $91, implying a gain of over 16% by late August. Investors simply cannot find that kind of technical clarity anywhere else, and this is why I take so much pride in my team and our work here at Tradespoon. We’re making investing a high-percentage proposition for winning not just once in a while, but all the time, and its selected picks like the XSW will crush the major averages and boost your stock investment portfolio returns for 2018 and beyond.
It would take a full-blown trade war and some unexpectedly high inflation data to undo the market’s uptrend, and I don’t see either happening at this point. A move up through 3.0% by the 10-yr Treasury will cause the market to bend, but not break. Earnings for the first quarter are going to be very robust. From the Earnings Insight published by FactSet, the following comments shed some light on the upcoming earnings season.
During the first two months of the first quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) rose by 5.7% (to $36.32 from $34.37) during this period. How significant is a 5.7% increase in the bottom-up EPS estimate during the first two months of a quarter? How does this decrease compare to recent quarters?
On average, the bottom-up EPS estimate usually decreases during the first two months of a quarter. During the past ten years, (40 quarters), the bottom-up EPS estimate has recorded an average decline of 4.0% during the first two months of a quarter. In fact, the first quarter of 2018 marked the largest increase in the bottom-up EPS estimate over the first two months of a quarter since FactSet began tracking the quarterly bottom-up EPS estimate in Q2 2002.
Analysts have not only increased EPS estimates for the first quarter, but also for the full year. The CY 2018 bottom-up EPS estimate increased by 7.3% (to $157.97 from $147.24) from December 31 through February 28. This is the largest increase in the annual EPS estimate for the index over the first two months of the year since FactSet began tracking the annual bottom-up EPS estimate in 1996.
Driving the increase in the bottom-up EPS estimate for Q1 2018 and CY 2018 is the decrease in the corporate tax rate for 2018 due to the new tax law and is clearly a significant factor in the upward revisions to EPS estimates. In addition, higher oil prices during the first two months of the year and higher interest rates that are bullish for the financials contributed to the upward revisions. So, while the market may wring its hands over interest rates and tariffs, the bull market is about to get a serious earnings jolt that will overwhelm everything else.
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