Earnings Won’t Wait for Trump


Next week at this time, Donald J, Trump will have been inaugurated as the 45th President of the United States. But the markets aren’t waiting.

The so-called Trump rally has stalled, as the Dow Jones Industrial Average, which seemed poised to top 20,000, now finds it hard to surmount the 19,000 barrier, let alone the magic round milestone number.

The Standard & Poor’s 500 index is holding up a little better, around 2,273, while the Nasdaq Composite Index, at about 5,573, is just short of its all-time high as technology, which lagged in the Trump rally, has quietly gained ground.

I think that tells us something particularly important about the market as earnings season begins.

That is: Earnings matter more than politics—and some of those good earnings are already in the share prices.

This morning, JP Morgan Chase beat Wall Street’s earnings and revenue expectations and CEO Jamie Dimon was particularly bullish on the economy. He said rising rates could boost the bank’s net interest income, a key metric for traditional banking. Trading revenues were better than expected, too.

Brian Moynihan, Bank of America’s CEO, said the bank was “well positioned and would continue to grow” in 2017. It, too, beat earnings estimates while boosting a planned share buyback.

Meanwhile, Wells Fargo’s earnings came in below expectations, hurt by the scandal in which 5,300 of the bank’s employees were fired for creating two million fake customer accounts. But since no bad deed goes unrewarded, its stock did better than either JPMorgan Chase or Bank of America did today.

Why? For the same reason, I think, that the Nasdaq has been outperforming the Dow or the S&P. Bank of America and JPMorgan have been superstars since the election, but investors may have anticipated the good earnings they’re now reporting. Wells Fargo, however, has lagged, and investors probably see better long-term value there.

That’s a key point: Trump’s election—and the relief that markets didn’t crash the day after—set off a rally that lasted through December. Sure, people were speculating on more fiscal stimulus and deregulation, but that may not happen, or it may take longer than many think.

Meanwhile, the economy has been humming along—GDP rose an annualized 3.5% in 2016’s third quarter—and the earnings recession is over. Oil prices may not hold up in the low $50-a-barrel range, but they likely won’t crash, either, so energy companies will report better earnings. That should push fourth-quarter earnings growth to 3.2% for the S&P 500, the first time they’ve shown year-over-year growth for two consecutive quarters since early 2015, according to FactSet Research.

So, as all eyes turn to Washington, D.C., don’t lose sight of earnings, because they tell the market’s real story.