U.S. Stocks ‘Highly Overvalued’ But Remain Tied To Trump’s Favorability: Credit Suisse
The Trump trade might be overdone. Even after the post-Jan. 30 slide, following the president’s controversial executive order on immigration curbs on seven Muslim countries, U.S. stocks remain “highly overvalued,” relative to 2018 earnings expectations, according to Credit Suisse.
“…on current 2018 expectations, U.S. stocks still look highly overvalued, with FY2 P/E’s in line with past highs for both small caps and large caps,” the Swiss bank’s U.S. Equity Strategy team said in a newsletter Feb. 2. Using FY2 P/E, small caps look pricey vs. large, though they don’t yet look expensive on the bank’s multi-factor model, it added.
“Some upside to 2018 EPS expectations may eventually materialize, but until it does, it is difficult to argue against the idea that stock market valuations are highly stretched,” the bank said.
Still, there is nothing yet to suggest key market and other indices are anything but tied to to the hip with Trump. Word out from a correlation analysis at the bank is this: The Trump trade is intact with stocks, 10-year Treasury yields, the dollar and crude oil closely tracking shifts in the controversial president’s favorability, as measured by RealClearPolitics.com.
Impact of Trump’s ratings on stocks
Within stocks, small caps, value, financials, cyclicals, domestic revenue producers and high taxpayers are particularly tied to shifts in Trump’s ratings, as are companies headquartered in states that voted for Trump.
In size and style, small caps were more positively correlated with Trump’s favorability than large caps, with the small/large trade also aligned on similar lines. Within each size segment, value indices leaned toward Trump more than the growth indices, with the value/growth trade also positively correlated.
Among the 11 sectors studied, financials was most positively correlated with Trump’s favorability. Among the 24 industry groups, banks was most positively correlated, whil energy also tracked Trump.
The bank’s analysis also found that stocks with high tax rates, purely domestic revenue exposures, and cyclicals were more positively correlated with Trump’s favorability than those with lower tax rates, high international exposure and defensives.
Did the sell-off on Jan. 30 change anything? Probably not.
The immigration executive order particularly impacted small caps and value stocks, both of which have been positively correlated to Trump’s favorability. Similarly, the sectors most positively correlated with Trump’s fortunes got hit the most – energy, materials, industrials and financials.
However, Credit Suisse said the market differed from its correlation analysis on two counts. Tech and software, inversely correlated with Trump’s favorability, fared worse, probably “due to fears over the impact of Trump’s immigration views – a reminder that news flow out of Washington remains a key risk for all sectors and groups in ways that cannot always be anticipated.”
The second surprise was in the resilience of telecom services, positively correlated with Trump’s favorability.
“Equity investors have been clamoring for specifics on the timing and details of Trump’s tax plans,” Credit Suisse pointed out, adding the uncertainty will likely persist for a period of time.
“Meanwhile, more controversial issues with less clear implications for the broader equity market have moved into the national spotlight like health care policy, immigration and global trade policy,” it added.
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Source: valuewalk
