Charles Schwab: Solid growth and strong earnings could keep this bull market alive

Screen Shot 2017 04 17 at 10.54.58 AMCharles Shwab‘Stocks have been rising in lock step with earnings expectations.’

Wall Street bears have a lot of evidence to make the argument that this bull market is running out of steam.

As reported by Business Insider’s Bob Bryan, a number of economic indicators are decelerating.

For instance, the March reading of the consumer price index showed a decline in prices for the first time since February 2016. And the Commerce Department reported that retail sales fell by 0.2% in March, the second straight decline for sales.

The outlook for economic growth in early 2017 also shows signs of weakness. The Atlanta Fed’s GDP Now tracker projects gross domestic product in the first quarter to grow a mere 0.5%, the lowest quarterly print in roughly two years.

But Charles Schwab, the $US289 billion brokerage firm, is optimistic that this market rally will continue. A note out April 14 by the firm, titled “Reassessing Risk and Reflection,” indicates that the firm hasn’t given up on Trump’s ever-elusive proposal for tax reform.

“We increasingly believe it will be late this year or into 2018 before we see anything done on the tax reform front, but we remain optimistic that it will get done, potentially providing a boost to stocks,” the bank said.

In light of the recent “Trumpcare” failure and scant details from the administration regarding tax reform, however, many investors are chalking up tax reform as a lost cause.

But even if tax reform doesn’t happen, Charles Schwab doesn’t necessarily view that as a huge blow to the markets. The firm thinks the current rally is more closely linked to global earnings. The note said (emphasis ours):

“Analysts have not been broadly incorporating into their estimates potential positives (U.S. tax reform, U.S. infrastructure spending) or potential negatives (trade barriers, European break-up costs) from policy changes. Instead they have been focused on the acceleration of global economic growth. In fact, stocks have been rising in lock step with earnings expectations.”

The firm expects positive earnings results would sustain the current market rally.

“The biggest risk to the global equity rally may be just ahead in the coming weeks, with the delivery of the first quarter earnings reports,” the note said. “We think the news will be good.”

The firm’s optimism comes from the possibility of improvement in global economic growth in the near future. “After peaking three years ago and suffering a long slide thereafter, the widely-watched global index of leading economic indicators (LEI) from the Organisation for Economic Cooperation and Development (OECD) has rebounded in recent months, pointing to improving global economic growth,” the bank said.

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