Trump, Tech, and Shareholder Yield
The first 100 days of the Trump administration posted the third best stock market performance for a first-term President since WWII (Figure 1). Thinking ahead, we asked Global Investment Strategist, Kevin Hebner of Epoch Investment Partners, to weigh in on the potential upside and downside risks going forward. Separately, we also picked his brain on a theme he and his colleagues have been developing called “Tech is the New Macro.” Epoch Investment Partners subadvises multiple mutual funds for MainStay Investments.
First 100 Days
Rightly or wrongly, ever since Franklin Delano Roosevelt made his first 100 days in office a yardstick to be measured by, subsequent presidencies have received “100-day” scrutiny, as well. President Trump’s legacy was not achieved during his first 100 days. However, the stock market has done well, and this comes on top of a strong post-election rally into Inauguration Day. Since WWII, only Presidents Kennedy (1961) and Bush (1989) saw better stock market performance over their first 100 days in office among first-term presidents.
Figure 1 – S&P 500 Index Price Returns after First 100 Days
Sources: CNBC, CFRA; data as of 4/27/17. Past performance is no guarantee of future results.
What lies ahead? Against a backdrop of growing corporate earnings, Hebner ticked off a number of potential upside and downside risks he and his colleagues have been vetting.
Starting on the positive side, corporate tax cuts, if enacted, would provide a boost to after-tax earnings with just a five percentage point reduction in the effective rate, providing an $8-$10 lift to S&P 500 earnings-per-share (EPS). At today’s forward price/earnings ratio of 17, that would translate into 135 to 170 points on the S&P 500 Index.
Allowing for the repatriation of profits held offshore (estimated at over $2 trillion) would primarily benefit technology and health care stocks, as these companies hold significant amounts of cash overseas. Meanwhile, well-crafted deregulation could provide a boost for the finance and energy sectors, and a rise in defense spending would support defense contractors.
More clarity is necessary to decipher the specific ramifications of a $1 trillion infrastructure spending program, but small businesses – so vital for job growth – would benefit if animal spirits kicked in. The pace of credit growth would likely follow any pickup in the pace of the economy.
Recent happenings on the Korean peninsula and in Afghanistan are a reminder that geopolitical provocations are low-probability events until they aren’t. Protectionism and anti-immigration could threaten to reverse the labor cost and supply-chain benefits of globalization. Finally, higher interest rates could pressure equity market multiples.
In all, Hebner believes we are in a 5-7% per-annum total-return environment for developed market equities, underneath the upside and downside risks we discussed.
Tech is the New Macro
One doesn’t have to look much beyond the retail industry to see the impact of technology. Fortunes are on the rise for select online retailers at the expense of traditional stores.
In general, technology-for-labor substitution is a positive development for profit margins, according to Hebner. But it can hasten the movement towards more global champions and more concentrated sectors. As firms move towards more asset-light business models, they should be able to pull more money out of their businesses and pass it along to shareholders when it makes sense. Knowing when it makes sense will matter more than it ever has before.
As a result, Epoch is favoring companies that generate free cash flow, are led by strong management teams, and are trusted stewards of their firms’ capital via a robust capital allocation process. In the U.S., their emphasis is on financials, domestic cyclicals, and small-cap stocks; elsewhere, defensive, interest-rate sensitive, and cheaper global champions look attractive in Europe, and they remain generally cautious on Japanese stocks, although they are looking closely at selected opportunities.
We believe growth and inflation are expected to inch up in 2017. While no one can predict the future, firms that allocate capital wisely, generate profits, and possess a shareholder-friendly culture should be in a favorable position to add value over time.
Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
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All investments are subject to market risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market.
Earnings-per-share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock.
Small cap is a term used to classify companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares.
The S&P 500 Index is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Past performance is no guarantee of future results. An investment cannot be made in an index.
MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. New York Life Investment Management LLC engages the services of Epoch Investment Partners, Inc., an unaffiliated, federally registered adviser, to sub-advise several mutual funds.