From promises to policy: What’s in store for US stocks?
Trade agreements and tax reform could impact corporate earnings
As of today, we have more questions than answers about what to expect from the new Donald Trump administration. Certainly, it appears the US 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 domestic 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 US, or retaliation from our trade partners against US 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 have seen 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 looking for.
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 US 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 Fund is underweight the US versus its benchmark, the MSCI All Country World Growth Index. 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 US 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
Blog header image: View Apart/Shutterstock.com
The MSCI All Country World Growth Index is an unmanaged index considered representative of large- and mid-cap growth stocks across developed and emerging markets.
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.
Invesco Global Growth Fund risks
Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
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Ryan Amerman, CFA
Ryan Amerman is a Portfolio Manager with the Invesco International and Global Growth team, focusing on large- and mid-cap US equities. Mr. Amerman is a co-manager of the Invesco Global Growth strategy.
Mr. Amerman joined the International and Global Growth team in his current role in 2013. Prior to joining the International and Global Growth team, he served as a portfolio manager with the US Large Cap Growth team, which he joined in 2001, and was responsible for the US equity component within Invesco’s Global Growth strategy since 2011. Prior to assuming portfolio management duties, he had served in various equity analyst positions from 2001 to 2008. Mr. Amerman entered the investment management industry in 1996, working in the transfer agency at Invesco.
A native of Houston, Texas, Mr. Amerman earned a BBA degree from Stephen F. Austin State University and an MBA with an emphasis in finance from the University of St. Thomas. He is a CFA charterholder.