As we approach the end of the first-quarter earnings season, the state of health of the corporate sector is that much clearer: An earnings recession is in full swing. Earnings for the S&P 500 have seen their third consecutive quarter of declines, and will likely be down by approximately 6 per cent year-over-year. While things look better if you adjust for the severe decline in the energy sector, it’s still nothing to write home about.
In previous CIO Perspectives, we have talked about how this lacklustre earnings season could give way to better results in the second half of the year, now that oil and dollar headwinds have eased off. At the same time, I have urged caution against chasing the recent market rally because we still feel a more significant earnings breakout is necessary for the market to move above its current trading range.
There is now clarity on another front, too: We finally know who will contest this year’s US presidential race.
Unfortunately, that may be the only thing that is clear in a campaign which has set new standards for unpredictability. Donald Trump’s candidacy was met with derision a year ago. Until his rivals threw in the towel last week, many were sure that we were headed for a contested Republican convention. Why should the unpredictability stop now? Trump could lose by a landslide or win by a landslide — your guess is as good as mine.
Campaign could distract from fundamentals
The distraction of a Clinton-Trump matchup could subdue sentiment over the next few months, but it may also direct market attention away from the more important questions about what sort of fiscal policies we should expect from this political transition.
At the moment, our concern is that we will not get what would be helpful in supporting a fundamental earnings recovery — regardless of who wins the election.
An unpopular president will lack a real mandate
Hillary Clinton’s average “strongly unfavourable” rating in recent polls has been around 37 per cent, while Trump’s has been a staggering 53 per cent. No one else in recent history has managed to alienate more than 32 per cent of the electorate at this stage of a presidential campaign.
This matters because we believe that when the president lacks a real mandate it reduces the likelihood of meaningful policy progress on a number of vital issues for the corporate sector: corporate tax reform, infrastructure spending, and more rational regulatory and trade policy.
On corporate taxation alone, the US remains weighed down by a needlessly complex code, higher rates of taxation than those of similar economies, and a problem with tax repatriation that constrains potential investment in our economy. On trade, even the starting position isn’t pretty. Trump is the first antitrade Republican nominee in decades, and Clinton has tacked a long way to the left to hold off Bernie Sanders for the Democratic candidacy.
Fiscal gridlock and trade uncertainty could leave the Federal Reserve still doing all the heavy lifting to keep our economic recovery on track.
Populist policies threaten long-term damage
Moreover, these are not just US issues. The economic nationalism and populism evident in presidential campaign rhetoric are increasingly heard around the referendum on the U.K.’s membership in the European Union, for example, and in trade, currency, industrial and immigration policy debates worldwide.
Even as fundamentals improve, it could be these concerns that determine market sentiment for the rest of 2016.
Joseph V. Amato, President and Chief Investment Officer — Equities, Neuberger Berman
