Stock Market: The War On Business Has Ended

(Drivebycuriosity) - The US stock market is on a tear. The S&P 500, the gauge for the US stock market, gained 15% year-to-date, about twice as much as the long term annual average (driveby). I think this year´s rally has two engines:

1. Strong earnings growth: Companies are now reporting earnings & revenues from the third quarter. The financial information service Zacks reports: "We now have Q3 results from 272 S&P 500 members that combined account for 64.2% of the index's total market capitalization. Total earnings for these companies are up +8.7% from the same period last year on +6.7% higher revenues, with 75.7% beating EPS estimates and 66.2% beating revenue estimates" (nasdaq).

So company earnings are rising almost as fast as the stock prices, keeping valuations reasonable (price-earnings-relations). Why can profits climb so fast in a slow growth economy? Company earnings are rising faster than the national incomes (GDPs) because corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. The skeptics underestimate how good leading companies are at squeezing out climbing profits even in a sluggish economy. They are learning organisms because they are managed by humans who are getting better and better over time by continuously improving themselves and their companies.  

2. The political climate in the US has changed and the war on business has ended. The Obama administration had fought a war on business (observer): They raised the top tax rate of every major U.S. tax, except the corporate rate, which was already the highest in the developed world; They imposed draconian regulation on health care, finance and most importantly energy, just when America was emerging with the resources for energy independence to lead the world in production of oil, natural gas and coal and they raised federal spending, deficits and debt to highest in American history by far.

High taxes & regulation reduced the incentive to invest. As a result the US had the slowest recovery after the 2008 recession since World War II and the economy grew much slower than on average - just about 2% annually instead the usual 3-4%. The chart above shows that the US economy expanded slower than the trend and "relative to its previous trend, the US economy is more than $3 trillion smaller than it might have been had things played out this time as they have before" (scottgrannis).

Things are changing now. The Trump administration already stopped the rise of new regulation and started to roll back existing regulation (bloomberg weeklystandard). President Trump is also working on a tax reform with the aim to cut corporation tax rates. De-regulation & tax cuts will  reduce financial burdens and so encourage investing and foster economic growth & company profits.

I believe both engines will keep the stock market rally alive for many months. Enjoy!.