The market optimism following the US election has waned but the economic recovery remains in place. Notwithstanding where we are in a political cycle, I think there has been an underestimation of the pent-up demand in the US and the effects of that being unleashed. An economic recovery was occurring before January when Trump came to power and this is likely to continue.
Paul Moore, Chief Investment Officer
However, you do need to pick your companies carefully; you need to be looking for specific opportunities and they are there, Trump or no Trump.
We have definitely seen an upward move and as is common with markets we’ll see two steps forward, one step back. Part of the gain is definitely justified by the expectation that there should be some positive impact from Trump. How much, though? The markets are ahead of the curve and the type of change we will see is difficult to tell.
The proposed 30% tax cut will create a 30% increase in earnings for domestic companies. So if you look at the banks, for example, they have had a good move and are now selling on about 12 times 2018 numbers, which is actually fair value. But if those tax decreases go through, their earnings will increase and their current multiple will be about 10 times.
It is hard to work out how much of the recent gain is on expectations and how much on current fundamentals, but I still think the market is holding itself back a little because they want to see the changes, like the tax cuts, go through. The markets are not euphoric as yet; there is room for earnings growth and market appreciation.