Summary
Markets hate uncertainty and there’s plenty of it, these days.  Furthermore, recession talk isn’t helpful for the markets.  Corporate tax cuts, deregulation, and increased M&A are bullish for equities.  In general, tariffs, and deportations, are not business friendly – especially shorter term.

Investors are attempting to determine if policies will be business-friendly, or not, or a combination of both.  It seems we went from excitement over pro-business policies only to find less business-friendly plans as what appears to be the emphasis, today.  Of course, with time, this can change.  

So far, corporate earnings have remained relatively resilient.  This week, CPI, PPI, the University of Michigan survey, and a government shutdown, will be key factors.  It is unlikely that a government shutdown would be well received by the markets.

The Details
The more uncertain things appear, the more valuable investment fundamentals are to keep us on track.  

At first glance, the equity markets with current earnings expectations appear to be trading a bit rich.  However, the outlook for earnings could change significantly based on potential policy changes.  In fact, with an increase in earnings, the market is trading closer to its 5-year average multiple.  However, if earnings decline, the market would be even more overvalued.  Let’s examine the issues at hand that can influence corporate earnings.

Corporate Earnings     
Corporate earnings (the amount corporations in the S&P 500 make) have increased by approximately 8% / year, over the last decade.  With Q4 earnings season drawing to a close, it appears corporate earnings likely grew by approximately 10% in 2024.  This year, in 2025, corporate earnings are forecasted to grow approximately 12% and next year by 14%, according to FactSet Street consensus data.  This is lower than the 15% forecast previously predicted for 2024, but still higher than the mean-average growth rate over the last decade.

The Math
The Wall Street consensus of 2025 corporate earnings stands at approximately $271, per FactSet.  Therefore, with today’s close, the market is currently trading at 20.7 times anticipated earnings.  This is higher than the 10-year average of 18.3, and the 5-year average of 19.8.

Not Politics but Policies
Rarely does it pay to allow one’s political ideology to influence their investment decisions.  When one’s party is in charge, investors tend to have greater confidence in the economy and outlook than perhaps prudent.  Likewise, when one’s party is out, one can be overly pessimistic.  This is why it is critically important to view things based on reason and logic – by primarily using fundamental research as a long-term guide.  Let’s dive into potential policy changes that could impact corporate earnings and therefore the markets.  Some policy changes are viewed as pro-business and might serve as tailwinds.  Other policies might serve as headwinds.  

Possible Tailwinds
There are some fairly significant headwinds, and tailwinds that could impact corporate earnings.  Should corporate tax rates fall to say 15% from the current 21%, the $271 earnings’ expectations should increase.  Goldman Sachs suggests earnings could increase by 1% for every 1% change in tax rates.  If true, a 6% cut in overall tax rates would result in earnings of over $287 – all things being equal.  This tax cut alone would bring the market to 19.56 times earnings – which is below the five-year average multiple of 19.8.   

Another potential tailwind for the markets would be cost savings due to deregulation.  According to the National Association of Manufacturers, it costs US corporations over $3 trillion to comply with federal regulations.  Although hard to quantify the average savings per share by S&P 500 components, it seems reasonable to believe that meaningful deregulation would add to corporate earnings due to cost savings.

Increased mergers and acquisitions could serve as an additional tailwind.  With a more pro-business regulator, one could see an era of increased deal-making setting in.

The market rally, and subsequent decline, this year, has seen the broader market (evenly-weighted S&P) holding up better than the market-cap weighted index.  This is important for it shows a broader base.  It seems diversification and asset allocation are working better than merely growth – a change from the last couple of years.

Possible Headwinds
It is possible there could be some benefits to tariffs – longer term, or even shorter term, if tariffs end up being lowered around the globe.  Unfortunately, it is difficult to see how higher tariffs are good for the US economy or corporate earnings.  

Many believe tariffs are passed along to the end user or consumer.  In some cases this is true.  When corporations successfully pass along increased tariffs, this likely results in higher inflation – at least over the initial time period when incurred.  Should tariffs remain in place longer, say over years, tariffs are no longer seen as inflationary over subsequent years due to inflation being a measurement of change over the prior period of time.  When tariffs are not passed along to the consumer, earnings are eroded, and therefore result in lower earnings for corporations, and therefore result in changing multiples – as demonstrated above.  Either way, it is difficult seeing higher tariffs as favorable for the US economy or corporate earnings.
Another headwind is mass deportations.  The US already has a tight labor market.  In fact, unemployment currently stands at 4.1%.  Fewer workers results in higher wages.  At times, higher wages can be the precursor to a wage spiral resulting in higher inflation.  Higher inflation prevents the Fed from being more accommodative. 

Geopolitical uncertainty remains and perhaps is growing.   

Putting it all Together
Based on President Trump’s first term, it was thought by many that he would change course if the markets reacted negatively to policy positions.  This provided comfort for equity investors.  However, according to recent remarks, one might not take as much comfort in this belief as perhaps one could during the first Trump term.

The markets have been jittery as a barrage of potential changes are being proposed / announced.  Some of these policy changes might benefit corporate earnings, whereas others appear to hurt corporate earnings.  With corporate earnings as our guide, this is an attempt to find direction, without allowing personal bias or politics to influence the analysis.  

During times of volatility, one of the key questions to ponder is time horizon.  Asking oneself if the market is likely to be higher in the future often puts things in perspective.  Will the market be higher in a year, two years, three years, ten years?  

Things can change quickly.  Market timing is tricky.  It was only a few weeks back that the S&P hit an all-time record high. With recent volatility, imagine things will continue to be choppy for a while.  Once we know the impact of policy changes on corporate earnings, we will have a better glimpse into the future.  A market correction may be upon us.  But, for those investors with a longer-term investment horizon, staying the course is likely prudent.  

Interesting times!  Here, to discuss specific portfolio details and to address any questions, comments, concerns.    

Thank you.