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For stock market investors, it’s still all about earnings, economic growth—and hopes for corporate tax cuts.
U.S. stocks opened slightly lower, and were recently trading nearly flat, on Wednesday as investors largely took President Donald Trump’s firing of FBI Director James Comey in stride. Stocks remain not far off the record highs set this week by the S&P 500 SPX, +0.09% and Nasdaq Composite Index COMP, +0.09% while the Dow Jones Industrial Average DJIA, -0.08% hovers not far below its own all-time high.
“I think stocks basically are driven by the underlying fundamentals—the earnings picture and the growth picture more than anything else…I’m not sure the FBI director position has much to do with the stock market,” said Michael Arone, chief investment strategist at Boston-based State Street Global Advisors, with $2.4 trillion in assets under management, in a phone interview.
As of Friday, 83% of companies in the S&P 500 had reported first-quarter results, for a blended earnings growth rate of 13.5%, which would be the highest year-over-year growth since the third quarter of 2011, according to FactSet.
The strength in earnings has provided support for the market as initial expectations that a Trump administration and a Republican-controlled Congress would move to quickly enact tax cuts and other business-friendly measures ran into disappointment.
The Comey firing is “more of a political story than a markets story…Implications directly for the market are pretty muted,” Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners, told MarketWatch.
That could change, he said, depending on the fallout. But unless investors become convinced that tax cuts won’t happen in 2017, or barring some other unforeseen catalyst, stocks can likely remain near current levels, he said.
Expectations for a huge corporate tax cut to 15% from 35%, along with a measure that would encourage firms to repatriate cash held overseas, were credited with pushing stocks to new highs in near-euphoric trading following Trump’s November election victory. But analysts had long ago pointed out evidence that tax-cut expectations had started to fade earlier this year, with baskets of high-tax companies giving back the outperformance that had immediately followed the election.
Investors still expect a substantial cut, but not necessarily on the scale outlined by the administration.
“I think the stock market has certainly priced in a policy agenda that includes tax reform, deregulation, and an improved health-care bill,” Arone said. “If we are not able to get some progress on those Items, I do think stocks will eventually re-rate themselves to reflect lower growth and a higher tax rate.”
Barring any other catalysts, a derailment could be enough to spark a “typical correction” of 5% to 10%, he said. A continued pickup in earnings growth, however, could cushion the blow, serving “to absorb any policy agenda stalls.”
Comey’s firing unified Democrats around calls for the appointment of a special prosecutor to handle the investigation into possible links between Trump’s campaign associates and Russian officials. Several Republicans also questioned the timing and circumstances of the firing, but stopped short of calling for a special counsel.
For some veteran Washington watchers, the situation calls prospects for the Trump agenda into serious question.
“Make no mistake—tax reform is dead for this year. But the fundamentals—moderate GDP growth, low inflation, low interest rates, good corporate earnings—will persist,” said Greg Valliere, chief global strategist at Horizon Investments, in a note.
Key congressional committees will begin marking up a tax bill, but there will be little appetite for working with the White House, he said.
Indeed, the reverberations from the Comey firing come just after the administration won a hard-fought battle to pass a House bill to repeal and replace Obamacare—an achievement that was due “in no small measure to White House engagement and political capital,” said Chris Krueger, senior policy analyst at Cowen & Co., in a note.
So far, at least four Republican senators have made comments that sounded critical of the Comey firing, Krueger said. With Republicans holding 52 seats in the 100-seat Senate, opposition from just three members of the party can block anything.
Meanwhile, there are four hurdles for the Senate to clear before there is even a vote on taxes, Krueger said, including work on the health bill, the fiscal 2018 budget, a continuing resolution to keep the government open after a current funding measure expires Oct. 1, and the debt ceiling, he said. He said a soft July deadline to complete the Senate version of the health bill is crucial.
The Comey dismissal ”is going to consume most of the oxygen in Washington for foreseeable future and makes that deadline all the more challenging. Any momentum from the House health-care passage last week just went up in smoke,” he said.
Meanwhile, Valliere argued that comparisons to the Watergate scandal are off the mark and that talk of potential impeachment is premature. But it’s still a potentially dire situation for the Trump administration and the prospects for its agenda.
“There’s the smell of blood in the water, as the press scrambles for the next bombshell and Trump’s polticial allies abandon him. The specter of a presidency in trouble is not a good story for the markets—or the country,” he said.