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Unusually firm profit outlook buoys the Trump rally

Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell on March 22.


Mystified about how the Trump stock bump keeps surviving presidential setbacks? Look at a pillar of the trade that predates his election.

It's the revival in S&P 500 index earnings that began last year and appears certain to accelerate when results come due next month. Evidence is building that companies will make good on forecasts for 10 per cent growth in the March quarter, among it a resistance among analysts to lowering forecasts that hasn't been seen since 2012.

While stocks have been ascending ever since the election, it's unlikely the rally would've gotten this far without the contemporaneous improvement in earnings, which last year ended one of the longest streaks of declines ever in a U.S. bull market. Gains are all but essential for keeping equities aloft with price-earnings ratios approaching 22.

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"In our mind, this has been driven more by economics and earnings, and less by the Trump phenomenon," Tobias Levkovich, Citigroup Inc.'s chief U.S. equity strategist, said in an interview.

For the first time since 2011, hopes for double-digit growth in U.S. earnings aren't a fantasy. Despite oil's slump to skepticism over President Donald Trump's growth agenda, Wall Street analysts have been standing firm on forecasts that represent almost twice the profit growth seen in 2013, a year when the S&P 500 rose 30 per cent.

S&P 500 operating income will rise 12 per cent to $130.20 (U.S.) a share this year, estimates compiled by Bloomberg show. The target has sunk by only 0.8 per cent from its level in January, the smallest deterioration in five years. For anyone who watched in 2015 and 2016 as growth estimates shrivelled to zero as reporting season drew near, the persistence is welcome news.

While the failure of last week's health bill has fuelled doubts over Mr. Trump's plans to cut taxes and ease regulations, the fact that earnings growth – upon which near-record share prices are predicated – won't vaporize is perhaps why dip buying such as Monday's has prevented any major sell-offs in the market.

Until last week, the S&P 500 had gone more than 100 days without a 1-per-cent loss, the longest stretch since 1995. While stocks fell in eight of the past 11 days, the index is less than 2 per cent from its record high reached on March 1.

As the economy strengthens and earnings accelerate, stocks are likely to become more attractive, according to Jeremy Klein, chief market strategist at FBN Securities Inc. S&P 500 profit will rise 9.8 per cent in the first quarter before picking up to 14 per cent in the final three months of the year, analyst estimates show.

"Any positive inertia will almost assuredly persist regardless of whether Washington can make meaningful progress on future legislation," Mr. Klein said. "Extremely sanguine profit projections have held their ground for upcoming quarters. Stocks will therefore cheapen merely as we roll through the calendar."

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