Strong Corporate Profits Buoy US Stock Market

S&P 500, Dow Jones notch fresh records, showing resilience to trade worries
September 20, 2018 Updated: September 20, 2018

The S&P 500 and Dow Jones Industrial Average hit record highs on Sept. 20, as tax reform continues to boost corporate profits.

While the uncertainty surrounding the trade war with China continues to rise, investors are confident the battle will cause less economic damage than feared.

The S&P 500 index gained 0.78 percent on Sept. 20 and the Dow Jones Industrial Average rose 0.95 percent, with the Dow at its highest closing level since late January.

Apple Inc. has been the biggest contributor to Dow’s surge over the past six months, followed by UnitedHealth Group Inc. and Boeing Corp.

The Nasdaq Composite also climbed almost 1 percent on Sept. 20, boosted by an increase in Amazon shares.

President Donald Trump touted the markets with a tweet, stating “Congratulations USA!”

Economists credit the strong economic growth to the tax-reform bill passed in December of last year. The new tax code slashed the corporate tax rate to 21 percent from 35 percent, sending company profits sharply higher this year.

S&P 500 companies are projected to post earnings growth of 20 percent year-on-year in the third quarter, after growing 25 percent in the first two quarters, according to FactSet.

“The trade war is real and will continue beyond the election,” said Jason Escamilla, CEO and chief investment officer at ImpactAdvisor, a wealth-management firm.

“But the trade war’s effects are a rounding error compared to the huge tailwind created by tax reform. Tax reform alone will continue to drive corporate profits.”

A Goldman Sachs report states that financial markets have already absorbed the likelihood of an escalating trade war with China. The report predicts the effect of the increased tariffs on the economy to be modest.

“If all of the proposed tariffs were implemented, they could boost core PCE inflation by around 0.3 percentage point year-on-year,” according to the report.

American stocks have substantially outperformed foreign stocks since May, when the trade disputes between the United States and other trading markets began to heat up.

U.S. stocks have risen over 10 percent year-to-date, while foreign stocks are down 3.5 percent. The robust economic and earnings growth, as well as the stability and the safety of the U.S. market, have attracted investors, according to experts.

The trade tension between the United States and China escalated recently when the Trump administration decided to proceed with imposing tariffs on an additional $200 billion in Chinese goods.

Trump warned of further retaliation against China and accused Beijing of seeking to influence the midterms this fall by targeting U.S. farmers and industrial workers with high tariffs.

Trump is confident that the United States is winning the trade war.

“We placed massive tariffs on China and tariffs have really had a positive impact,” Trump said in a short video he posted on Twitter on Sept. 20.

“Number one, our country is taking in a lot of money. Number two, we are creating jobs like never before.”

The markets’ rally over the past three months has been a good sign of investor confidence, according to Stoyan Panayotov, CEO of Babylon Wealth Management.

“Investors believe that the trade war will not impact the U.S. economy as negatively as feared earlier,” he said.

“As long as U.S. businesses continue to report strong earnings and revenue growth, the rally can be sustained.”

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