The stock market is hypersensitive to economic data and the business-friendly freebies dangled by President Donald Trump. But Trump-mania is likely to fade as the watered-down realities of budget negotiations become apparent.
We think equities could correct soon, but the main feature would be a change in market leadership. In fact a rotation out of the ‘value’ reflationary plays into more reliable ‘growth’ stocks has already begun.
We are frequently questioned about the high valuation of equities – most developed markets are trading at a 10-20% premium to their 10-year average. This tells us that the market is clearly expecting improving economic data to drive significant earnings upgrades.
The risk here seems greatest for value stocks, where valuations are now at 40-year highs, banking on a reflationary boom to bail them out.
If the economic data start to fade and the earnings impact of the Trump policy agenda gets diluted, then the medium-term outperformance of growth stocks would intensify.