While they’ve struggled to push higher in recent days, US stocks have enjoyed a stellar run since Americans voted in the US presidential election back in early November.
The S&P 500 index has added a nifty 6% since the vote, hitting a fresh record high in the process.
Fuelled by the belief that Donald Trump’s reflationary fiscal policies will prove a boon to US economy – and to corporate earnings as a consequence – investors have been buying stocks and largely overlooking the potential increased geopolitical risks.
Along with optimism towards a the US economy under a Trump presidency, stocks have also been helped by a raft of stronger-than-expected US economic data, adding to the belief that a fiscal stimulus splurge from Trump, on what appears to be an already strong economy, could lead to even higher growth, higher inflation and higher US interest rates.
However, according to Barclay’s global equity strategy team, much of the recent improvement in the data has largely come from surveys measuring sentiment, rather than the real economy.
People think things are improving but it’s yet to be seen in the hard data – at least not yet.
“Survey-based economic data such as the regional manufacturing indices and consumer confidence have been very strong recently, coming in 1.2 standard deviations above expectations,” analysts at the bank wrote.
“Other hard data has been more mixed with industrial sector data still surprising negatively. Housing data has been positive, but similarly boosted by the most recent NAHB [National Association of Home Builders] survey.”
This chart from Barclays puts that into visual form. Excluding sentiment surveys and data on the housing market, most of the other major data points have either come in at or below expectation in recent months.
Barclays says that while most of the improvement to date has been limited to sentiment surveys, rather than hard data, it believes that a recent uplift in corporate earnings, along with improved sentiment levels, makes it optimistic on the outlook for US stocks in the year ahead
“The rally has been justified by fundamentals,” the bank says.
“The data driven rally has been disproportionately fuelled by corporate and consumer survey data which suggests that fundamental momentum should continue near-term as hard data reflects the jump in the manufacturing ISM [Institute of Supply Management] for instance.”
While there’s nothing to suggest that the improvement in sentiment won’t act as a lead indicator for hard data in the period ahead — it has in the past — it once again demonstrates the role that optimism has played in helping to spur significant gains across the US stock market.
It also suggests there’s now plenty of room for investor disappointment should the optimism towards Trump’s proposed polices not be matched by what is delivered in reality.