President Donald Trump is joined by the Congressional leadership and his family before formally signing his cabinet nominations into law, Friday, Jan. 20, 2107, in the President's Room of the Senate on Capitol Hill in Washington. From left are, Vice President Mike Pence, the president's wife Melania Trump, their son Barron Trump, and House Speaker Paul Ryan of Wis. THE CANADIAN PRESS/ AP/J. Scott Applewhite, PoolThe Associated Press
If the "Trump Rally" is going to regain its legs now that Donald Trump is in the White House, corporate earnings will likely have to come up big this week.
After the sharp run-up in stocks following the election, the market ran out of steam in the month leading up to last Friday's inauguration, with the S&P 500 index gaining just 0.1 per cent. Treasuries and the U.S. dollar have also largely been in a holding pattern.
"For all intents and purposes, prices have come to a standstill after the initial post-election reflation trade rush," Bank of Montreal chief economist Douglas Porter said in a note.
So far, fourth-quarter earnings have been good, but they may have to be great to reignite the rally.
Through Friday, 12 per cent of S&P 500 companies had reported results and 61 per cent of those had topped earnings estimates. While that may sound encouraging, it's actually below the five-year average of 67 per cent, according to FactSet Research.
Currently, the "blended" growth rate for fourth-quarter earnings – which includes actual results for companies that have reported and analyst estimates for the rest – now stands at 3.4 per cent. If the final number is positive, it would mark the second consecutive quarter that earnings have grown – the first back-to-back gain in nearly two years.
But that is far from certain. With 70 S&P 500 stocks – including 12 Dow Jones industrial average constituents – scheduled to report this week, the blended growth rate could well change over the next several days.
Given the market's strong postelection advance and the lofty expectations built into stock prices, investors may be quick to punish companies that fail to at least meet earnings estimates.
Major U.S. companies on deck this week include McDonald's Corp. on Monday, 3M Co., Johnson & Johnson, Verizon Communications Inc. and Alcoa Corp. on Tuesday, Abbott Laboratories and Boeing Co. on Wednesday, Alphabet Inc., Caterpillar Inc., Ford Motor Co., Intel Corp., Microsoft Corp. and Starbucks Corp. on Thursday and Colgate-Palmolive Co. on Friday.
In Canada, the earnings lineup includes Canadian National Railway Co. and Metro Inc. on Tuesday and Rogers Communications Inc. and Potash Corp. of Saskatchewan on Thursday.
Economic reports will also figure prominently in Mr. Trump's first week in office, with Friday's advance reading on fourth-quarter real gross domestic product taking centre stage.
According to Bloomberg, the U.S. economy is expected to have grown at a seasonally adjusted annual pace of 2.2 per cent in the final three months of 2016 after expanding by 3.5 per cent in the third quarter.
"Fourth-quarter GDP will reveal that the U.S. economy performed vastly better in the second half of 2016 than it did in the first," said Royce Mendes, senior economist with Canadian Imperial Bank of Commerce, which sees fourth-quarter U.S. GDP growing 2.5 per cent.
"The solid end to 2016 will provide a nice handoff to this year, and give Fed officials further signs that the economy will be able to sustain additional monetary tightening. That should have the central bank hike rates three times this year, with the first move coming in March."
In December, the Federal Reserve raised its benchmark federal funds rate by a quarter-point, to between 0.5 per cent and 0.75 per cent, and signalled that rates will likely continue to rise.
Friday's GDP report is just the first look at fourth-quarter growth. "Two future rounds of revisions on February 28th and March 30th … could result in a final print that bears little to no resemblance to the first estimate," Derek Holt, head of capital markets economics with Bank of Nova Scotia, said in a note.
Investors will also be closely watching Mr. Trump's first policy moves in office, which may well overshadow the backward-looking earnings and economics data, Mr. Holt said.
"If the guidance has been accurate, then expect directives and legislative actions to come fast and furiously as the new Trump administration kicks off the first 100 days in office," he said.
John Heinzl