World stocks are riding high, confounding sceptics who have believed that equities are riding for a fall given Trump unpredictability on one side of the Atlantic and Brexit uncertainty on the other. That is not the way it is going at present, however.
Equities have been driven higher in the past fortnight by a cocktail of the prospect of imminent swingeing tax cuts for corporate America and political concerns easing in the European Union (EU).
If Trump delivers on the tax cuts and infrastructure pledges, it is likely to be a further tailwind for stocks
The EU relief came after market‑friendly moderate Emmanuel Macron’s victory in the first round of the French general election last Sunday and his expected triumph in the second round run-off early next month.
That saw the French stock market leap 4 per cent to its highest level in two years, as the shadow retreated of far-right candidate Marine Le Pen and her threat to leave the euro and renegotiate EU treaties. The euro traded up between 1 and 2 per cent, and the UK stock market joined in the sigh of relief, with the FTSE 100 blue-chip index closing up 2 per cent on Monday.
Then the tech-heavy Nasdaq index in the US hit 6,000 for the first time on Tuesday as investors ploughed into technology and smaller companies on hopes that the President’s corporation tax cutting will see renewed strong growth.
Since then markets have paused for breath, but there have been no renewed jitters. The optimism has been buttressed by a strong Q1 earnings performance by US and European companies, not least the heavyweight American investment banks.
In the past fortnight, 15 of the US Dow Jones’s index 30 component companies have reported results, and 11 of them have beaten expectations.
Market bulls also believe that big American corporation tax cuts will also pave the way for Trump’s other big idea: throwing trillions of pounds at America’s creaking infrastructure.
Financial markets, particularly major construction and engineering stocks, have been salivating at the prospects for a knock-on Eldorado from such a policy.
One market strategist said: “The mood is better, partly on company fundamentals and partly on politics. The relief started when the Dutch electorate turned its back on the anti-EU populist tide in March. And some argue that financial markets overdid the pessimism ahead of the French election and so have bounced disproportionately.
“That has coincided with widespread economic data that has not scared the horses. Look at the resilience of the UK economy since the Brexit vote.”
On the reassuring European Q1 earnings performances, Emmanuel Cau, global equity strategist at JP Morgan, said: “We have had 25 per cent of companies reporting, and a majority of those have beaten estimates. Pretty much every single euro zone data point out has surprised to the upside, and this is driving (earnings) upgrades.”
Will the markets’ spike upwards continue? On earnings fundamentals, it could do. And if Trump delivers on the corporation tax cuts and his more problematic infrastructure pledges, then it is likely to be a further tailwind for stocks.
Historically low interest rates also mean that cash and low-yielding bonds are likely to remain tarnished asset classes. Therefore, there are many investors tempted to switch into equities for better yield, again providing a floor for the market. Noticeably rising UK inflation and the erosion of the value of cash is also normally a positive for shares.
Conversely, is there anything that could derail the current optimism? Most certainly any move by Trump towards his avowed Fortress America trade policy would achieve that negative effect. He has already made some worrying noises about steel and timber tariffs, while ironically turning down the anti-EU rhetoric since his election.
The only major macro-economic move the president has made in that direction so far has been to withdraw the United States from the big, but never finalised, Pacific trade deal that takes in a dozen countries. A resumption of serious tensions around the Korean peninsula, which have gone strangely quiet after recent verbal fireworks, might also be the macro-political factor that could lead to a notable correction in markets’ current optimism.
Macron’s likely election as French president is counterbalanced by the fact that he has no big party backing him so might very well have to fight hard to get any administrative programme through, engendering renewed voter dissatisfaction.
In short, the picture is finely balanced: there are definite reasons for the cheer, but the overall outlook is more nuanced than Panglossian.