This week is all about earnings and the ongoing health care debate in Washington, D.C. That story continues on Wednesday.
Headlining the earnings calendar will again be financial stocks, with Morgan Stanley (MS) and American Express (AXP) set to report results. Qualcomm (QCOM) and Reynolds American (RAI) will also be among the highlights.
As Business Insider noted on Tuesday, Goldman CFO Marty Chavez said on its earnings call, “It was a difficult quarter on all fronts … We didn’t navigate the market as well as we aspire to or as well as we have in the past.”
Expect investors to focus on this area of Morgan Stanley’s business on Wednesday.
Also in earnings news on Tuesday, Netflix (NFLX) shares surged 13% to a fresh high after reporting better-than-expected results Monday after the market close. This rally powered the tech-heavy Nasdaq to a record high while the S&P 500 also touched a new high.
Of the major U.S. averages, only the Dow finished in the red, dragged lower by Goldman Sachs.
Health care, don’t care
On Monday night into Tuesday, the Senate Republican plans for a new health care bill fell apart. Markets did little to react to this news. Which, at this point, is to be expected.
We’ve written time and again how markets have moved on from any “Trump trades” which were specific bets on policies that may have come out of the new administration following Donald Trump’s win in the presidential election.
On Tuesday, the U.S. dollar, perhaps the lone holdout among assets that moved in anticipation of some Trump policy, was down against all major currency pairs.
There are no “Trump trades” left.
But Wall Street strategists are still looking to Washington, D.C. for some sense of what might be coming next as we seek the ever-elusive concept of certainty that markets are purported to love.
Michael Wilson, equity strategist at Morgan Stanley, wrote this week that while almost all of the S&P 500’s roughly 15% rally since the election has been due to multiple expansion—that is, investors willing to pay more for one dollar of earnings—further expansion will be needed for the index to hit the firm’s 2,700 target. The S&P 500 closed at 2,460 on Tuesday.
“We acknowledge that in order for the S&P 500 to reach our 2,700 target, we will need to see equity multiples expand again later this year and approach our 19x forward 12 month earnings forecast,” Wilson writes.
He added, “Today, S&P 500 forward 12 month earnings P/E is stuck at approximately 17.5x. We think the catalyst on P/E expansion will be more policy ‘certainty’ rather than the outcome itself.”
Which is to say, markets don’t actually care what happens in Washington, D.C. Which we already knew. Markets just, we’re told, need to know what is or is not going to happen. The thing we need is certainty, not policy.
Wilson adds that, “No matter what gets passed in the next few months, we think just moving forward with a decision on the Affordable Care Act and taxes will provide the certainty necessary for companies and individuals to ‘act’ on their higher confidence readings which have remained elevated.”
Remember “animal spirits“? No resolution on policy, Wilson argues, will prevent them from being released.
It’s an old cliché that markets love certainty. And really, who wouldn’t like to know what is or is not going to happen in the future? After all, markets are only representing the emotions of the people that participate in them.
But if the last few months of market action have proven anything, it may be the opposite of this. In theory, certainty is good for the market, but what else have the early days of the Trump administration been but uncertain?
Nevertheless, stocks went up.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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