Here Is Why Trump Will Fail To Increase Earnings
As the theory goes, the stock market is up post election due to earnings growth anticipation that is likely to come from tax cuts, stimulus spending, infrastructure investment, jobs, etc...
In last night's article we discussed why Trump's "Phenomenal" tax cut plan is unlikely to materialize. You can learn more about it here. The Secret Behind Upcoming Stock Market Collapse
But it gets worse.
“Investors must reconcile S&P 500’s performance with negative EPS revisions from sell-side analysts,” the firm wrote in a note to clients. “Financial market reconciliation lies ahead: We are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.”
Here is a rather simple way to think about all of this.
Since 2008-now the market has operated, more or less, under unlimited liquidity conditions (zero interest rates and massive rounds of QE). During this period of time most corporations could borrow unlimited amounts of capital at nearly zero interest rates. Many did, spending some of it on CAPEX. However, most of the money went towards stock buybacks and M&A activity at dizzying valuations levels.
In other words, monetary expansion has pushed this clown show just about as far as it can go. Now, over the last two years S&P earnings are down close to 20%. Here is the chart (Yellow line).
The real question is.......if unlimited liquidity at zero interest rates has failed to propel earnings higher, can Trump "Phenomenal" tax cut accomplish the impossible?
The answer is NO.
Even if the "Phenomenal" tax cut gets though, all it will do is bump up earnings in a one time event. Let's say to the tune of 10-20%. Will corporations invest that money to grow the economy. No, not really. They can already do so today by borrowing at zero interest rates.
The problem is not the lack of capital, but too much of it. There is nothing to invest it at the present moment. Unless your balls sag to the ground and you believe buying S&P at 29.3 Shiller's P/E ratio is a good idea.
If you would like to find out exactly what happens next based on our Timing and Mathematical work, please Click Here.