UBS: US Equities - 100 Days On

Markets Embrace the Change

In the overnight hours of November 9th, exactly 100 days ago, Donald Trump gave his Election Victory speech. Since then, it seems markets have voted decisively to embrace Change, with the S&P 500 returning around 10% (15% from the 11/9 pre-dawn lows), the Dow Jones Industrials soaring past the 20,000 mark, and the small cap, domestic revenue ("America First") focused Russell 2000 up 17% (Figure 1). Option markets are pricing in Fear – Fear of Missing Out on further upside. Confidence in the future of the economy has climbed sharply on the part of consumers, CEOs and small businesses as the prospect of deregulation and a year of stronger growth (UBSe 2.4%) beckon. High expectations abound for corporate earnings in 2017 after an emphatic return to increasing profitability in 4Q 2016.

Smooth Sailing - or Clouds on the Horizon?

With the VIX near cycle lows, pricing in a cavalier attitude toward market risk, the question is, is there anything to worry about? While signs of an impending recession are reassuringly scant, there are a few clouds on the horizon. Bank lending has softened, capacity utilization continues to indicate no sign of a manufacturing pickup, new home sales are weakening and inflation appears to be firming, causing the Fed to recently reiterate its intent to hike three times in 2017. At 19.5x LTM earnings (17.8x consensus 2017, 18.6x 2017 UBSe), high expectations appear well priced into equities. In this regard, President Trump's 2/28 speech to Congress, where tax reform plans will likely be a focus, looms large. To keep stocks moving higher, investors will want to see the outlines of a proposal – despite the likelihood of many complications – that can get done in late 2017 or early 2018 as opposed to the last time tax reform occurred, in 1986, 5 years after President Reagan took office. The "Art of the Deal" awaits.

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