Equity Outlook with Gabelli Funds Chief Investment Officer Howard Ward.
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It’s that time of year again. March Madness I am referring to. Hopefully such madness will be restricted to college basketball and not include the stock market, which has acted pretty well of late.
Like him or not, President Trump should be credited with raising the economic growth expectations of Wall Street, the business community and consumers. Consumer confidence surveys are at the highest levels since 2001. Small business optimism is the highest since 2004 and the ISM Manufacturing Index is the highest since 2007.
We are most excited about the prospects for meaningful corporate tax reform, which could provide a boost to corporate earnings and make the U.S. more competitive on the world stage. We are most concerned about a potential trade war with China, which is responsible for about one half of our trade deficit. Should we impose new tariffs on Chinese imports, China has promised to retaliate. Such a trade war could easily include Japan, Mexico, Germany and Canada, all countries that contribute to our trade deficit.
The stock market as measured by the S&P 500 is up about 30% from its low in February of last year. After 2 years of flat earnings, we expect earnings to rise about 10% this year, to go along with real GDP growth of about 2.2%. Forecasting earnings and stock earnings multiples is always a dangerous indoor sport, especially now given significant policy uncertainty. Financial conditions, as evidenced by higher interest rates, a stronger dollar and a Fed determined to raise rates sooner rather than later, gives us pause, as does the stock market at record highs selling at 18.5 times forward earnings, the highest forward earnings multiple since 2004. Nevertheless, if President Trump succeeds in the areas of corporate tax reform and deregulation and sidesteps a disruptive trade war, any stock market pullback is likely to be short-lived.
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