How Much Credit Are Companies And Analysts Actually Giving Trump For The Rally?

From November 8, 2016 to March 15, 2017 – the 127 days from when Real Estate Mogul Donald Trump was elected president, to the day the Federal Reserve raised interest rates for the first time following the election - the S&P 500 rose 11.5 percent while the Dow Jones Industrial Average rose 14.3 percent. That is an incredible stretch by any means, and the type of run that usually follows a correction.

In fact, the last time we saw a comparable market increase over a similar span was Nov 2012-2013. Coincidentally, that period also followed an election, and the Dow and S&P 500 were also hitting record highs. The fuel for that rally was an improvement in the unemployment rate, and the continuation of Quantitative Easing (QE), which, given the low-yield environment, made stocks the preferred asset class. At the time, there was optimism that we were beginning to climb out of the Great Recession.

Fast forward to 2017. We are 5 percent passed the S&P 500 peak in 2007. Unemployment in the US is at 4.7 percent, and the Federal Reserve has just raised interest rates for the third time since the financial crisis. Growth outlooks for companies appear to be strong, buoyed by increased optimism in spending, by the consumer and government, and corporate tax reform.

So the question arises – what has caused this incredible rise? One theory is that the market rise has been led by strong corporate guidance, which has been given a further boost by the Trump agenda of infrastructure spending and tax reform. After all, earnings have slowly been improving since the recession ended in 2009. Earnings multiples are now at historically high levels. The argument behind which is that multiples will begin reverting to their means as the economy continues to improve and corporate earnings pick up. And with the pro-business, pro-growth policies of the new administration, the economy (and subsequently earnings), have widely been expected to improve even more.

But how much do corporations themselves believe in the growth-enhancing policies in improving their bottom lines? To find out, we look at corporate earnings and mentions of President Trump or the Trump administration.

Mentions Of Trump In Earnings Reports

In Q1’ 17, through March 22, the Trump administration was mentioned by 40 percent of S&P 500 companies, in earnings calls, press releases, or corporate presentations. Of those, 29 percent mention the Trump administration’s purported policies and revenue growth or an improved outlook (in Earnings calls or investor presentations). That’s just 11 percent of the S&P 500.

However, upon further examination, the majority of those mentions did not equate new policy initiatives to improved revenue or earnings. Rather, they stated that policies may change, but the implications of those potential changes cannot be known. As such, any upward guidance a company made, was likely the result of a perceived economic outlook and/or improved operations, not the direct impact of the Trump Administration’s agenda.

Granted, an “improved economic outlook” could relate to customer optimism. That could in turn be correlated to increased wages, the lowering of unemployment rates, or in somewhat of a catch-22, increasing investment portfolios due to rising stock prices.

Trump Mentions By Sell-Side Analysts

So if the companies themselves have not been touting Trump policy as a reason for increasing earnings forecasts, could the “Trump Bump” be attributed to sell-side analysts who are pulling in Trump policies into their models, and raising targets due to lower taxes, repatriation, reduced regulatory burden and fees, and increased government spending on infrastructure and military?

During Q1, through March 22, sell-side analysts mentioned the Trump Administration for 71 percent of the S&P 500, or 355 companies. In other words, at least one major brokerage firm mentioned something about Trump in an upgrade/downgrade, estimate, revisions, or coverage initiation documents. Using the same search parameters as for the companies themselves, we find that for 96 percent of the 355 companies in which President Trump or his administration are mentioned by analysts, there is also mention of improved outlook and/or revenue growth.

It would therefore seem that analysts are more inclined to equate the Trump administration with corporate growth. But if we dig deeper, we find that there isn’t a more definitive message about Trump Administration policy effects on company growth. Analysts, like the companies they cover, often mention that it is just too soon to predict outcomes due to possible policy changes. If analysts do make adjustments to their models, they likely wouldn’t do so until there is more clarity on policy direction, and proposals have actually been ruled into law.

What Does This Tell Us?

So from what we can tell, the notion of a “Trump Bump” is for now just a myth, as company communications and broker research among the S&P 500 provide an inconclusive picture with no direct indication that growth forecasts can be attributed to the President and his policies.

Perhaps the reason behind the rally we’re seeing isn’t risk-adjusted modeling, perhaps there is a more simple reason – an upward snowballing effect brought on by hope and anticipation. After all, consumer confidence in the US, has soared to its highest level since 2000. Considering that consumer spending makes up 70 percent of GDP, that confidence indicator is a huge boon for both the companies who will likely be the beneficiaries of loosening purse strings, as well as the US economy as a whole.

As ideas become policy, and policy gets implemented, we can continue to keep our finger on the pulse of the market for signs of whether or not such a bump can be traced back to the White House.

Jack Kokko is the CEO of AlphaSense, the financial search engine used by buy-side and sell-side firms. All views in this article are his own.