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market turmoil

Trader Thomas Donato, center, works on the floor of the New York Stock Exchange, Wednesday, May 17.Richard Drew/The Associated Press

The U.S. stock market's almost unblemished record of not caring about anything is getting its stiffest test yet, and whether the streak is preserved will say a lot about what's been driving it.

Even as prices buckled and almost $300 billion was erased from U.S. shares Wednesday, professional forecasters remain remarkably steadfast in their bullish outlook for equities. Estimates from Wall Street firms envision an 8.5-per-cent advance for the S&P 500 Index in 2017, almost 2 percentage points more than their counterparts in Europe.

The reason is profit expectations, which despite the political histrionics have managed to strengthen over a seasonal period when they almost always fall. For anyone trying to tell investor fortunes, the critical question becomes how long they can stay buoyant should the president's fortunes further dim.

"While the volatility around Washington has made for great headlines and influenced how investors 'think,' it hasn't mattered one bit to how investors 'act,"' Canaccord Genuity Inc.'s strategy Tony Dwyer wrote in a Monday note. "The market correlates most closely to the direction of earnings, and that direction remains positive."

For now, bulls are in retreat. The S&P 500 slid 1.2 per cent to 2,372.25 as of 12:30 p.m. in New York, headed for its biggest drop in two months. Market turbulence measured by the CBOE Volatility Index was up almost 30 per cent at one point, the biggest surge since September.

Mr. Trump is facing the deepest crisis of his presidency after contents of a memo written by James Comey when he was FBI director surfaced Tuesday, alleging that the president asked him to drop an investigation of former National Security Adviser Michael Flynn.

"The real question going forward is, will the American economy keep growing and will it grow in a constructive way?'' Donald Marron, chairman of Lightyear Capital LLC who served on former President George W. Bush's Council of Economic Advisers, said in an interview on Bloomberg Television. "That's the problem because that's where you get to these things in Washington. They can hold back changes in regulation, changes in health care, fundamental things that will make the health of the country better.''

Concern spread Wednesday that the rout marked a break from a six-month stretch in which U.S. stocks were immune to virtually everything -- as long as profit sentiment improved. Analysts, who normally cut full-year estimates in April, last month raised them, pushing forecasts for S&P 500 operating income above 12 per cent.

That came after a first quarter in which operating income jumped 14 per cent, the fastest in almost six years. Fuelled by the growth, U.S.. stocks have rallied 6 per cent in 2017 and 13 per cent since just before Trump's shock victory in November.

While it's obviously impossible to pinpoint how much of Mr. Trump's economic agenda has been embedded in analyst earnings estimates, a few deductions are possible.

For one, computer and software makers, no darlings of Mr. Trump after he proposed immigration restrictions and focused most of his rhetoric on the old economy, are leading the market. Bolstered by profits that are forecast to grow this year at almost twice the pace of the S&P 500, tech shares have jumped 17 per cent since January.

Another indication that Trump isn't everything may be the performance of companies reliant on overseas demand. A Goldman Sachs Group Inc. basket tracking stocks with the highest leverage to international growth has risen 13 percent, compared with 3 percent for a similar measure for domestic-focused companies.

While strategists such as Goldman's David Kostin expect a boost in earnings from Mr. Trump's proposed tax cuts, most of them don't see the full benefit until next year. The fact that analyst estimates have stayed stable since the Trump administration's failed health bill in March shows politics haven't started to affect earnings sentiment.

"Analysts have been hesitant to incorporate any policy changes in their forecasts because of the unknown around what's going to happen and when it's going to happen," Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, said by phone. "The underlying economic data has been improving, the earnings picture has been improving, and that's why I think the downside is still pretty limited."

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