Promises to policy: What’s in store for U.S. stocks?

Promises to policy: What’s in store for U.S. stocks?

by Ryan Amerman Portfolio Manager, Invesco Ltd., Invesco Canada

As of today, we have more questions than answers about what to expect from the new Donald Trump administration. Certainly, it appears the U.S. president has a pro-business and anti-regulation outlook, but how exactly will this translate into policy, and how will corporations and trading partners react? That remains to be seen.

Three questions to watch

Less regulation would be positive for economic growth and investment, in the view of the Invesco International and Global Growth team. For example, tax reform – both on a personal and business level – could lead to increased discretionary cash flow and demand for U.S. investments, which from a longer-term perspective could be positive for capital spending in the United States. Already, small-business confidence hit a 12-year high and chief executive officer confidence hit a 10-year high after the election.1

There are several questions, however, that bear watching:

  • Will renegotiations of trade agreements lead to better outcomes for the U.S., or retaliation from U.S. trade partners against U.S. companies? The fear is that the result could be retaliation and protectionism, but it remains to be seen how that might play out.
  • What’s in store for interest rates? Historically, tax cuts have been seen as a potentially positive force, as consumers and businesses have more money to spend. But if tax cuts are met by tightening monetary policy, rising rates could offset much of that impact. In our view, higher rates could be a negative for defensive sectors, such as consumer staples, that have benefited from “bond proxy” status, and a potential positive for cyclical sectors, such as financials, that have endured years of declining net interest margins.
  • Can the administration successfully work with Congress? Analysts and strategists have begun to include lower taxes and economic stimulus into their forward estimates. So now, it’s important that the new administration deliver on its campaign promises. The first few days of the administration saw a flurry of activity in that regard, but largely through executive orders. Significant issues such as tax reform will require the White House to successfully work with Congress. So, that’s something we’ll be watching.

What does this mean for EQV?

Ultimately, our team takes a bottom-up approach to stock-picking – we look to see how these big-picture issues affect a stock’s Earnings, Quality and Valuation (EQV) data.

Currently, valuations in the U.S. are relatively full, in our view, so we believe higher stock prices will largely be dependent on positive earnings revisions. We do not expect to see any meaningful impact on earnings from tax or other reforms until 2018 and beyond.

Invesco Global Growth Class is underweight the U.S. versus its benchmark, the MSCI ACWI. This has largely been a function of valuations, especially in the more defensive sectors where we’ve been underweight for quite some time. We’ve seen these sectors fall in price recently relative to the overall market, but they’ve yet to hit a level where we think they’re attractive from a risk/reward perspective. We have a watch list of U.S. stocks that we would like to own once they hit that level.

1 Source: NFIB Small Business Optimism Index and CEO Confidence Index, Chief Executive magazine

Net interest margin is the difference between interest earned and interest paid, which gauges how successfully a company, typically a bank, made its investments relative to its debt situation.
The MSCI ACWI is an unmanaged index considered representative of large- and mid-cap stocks.

This post was originally published at Invesco Canada Blog

Copyright © Invesco Canada Blog

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