The Charging Bull and Fearless Girl statues sit on Lower Broadway in New York. (AP Photo/Mark Lennihan)
There are essentially two components that make up a stock price or index value, earnings and what multiple investors apply to them. Multiple factors go into each one, but the final value can be derived from these two.
President Trump touts record Dow Jones Industrial prices whenever there is a new high (and also when it makes the same high even a year later) and views the stock market as a barometer of his Presidency. The markets performed very well from when he was elected to his first year in office, but has been essentially flat since then. It appears investors were looking forward to the tax cut but have not rewarded Trump or the market with higher prices for over 16 months.
For this analysis the S&P 500 is being used since it represents a broader view of the market and more information is available for it.
Obama’s market increased 113% over his eight years
The stock market had been in free fall a few months before President Obama’s election until just over a month after he took office. It then went on an extended run increasing 113% from his election day until the day Trump was elected. It was also up 42% in his first four years in office.
- Day of his election: 1,006
- Day after his election: 953, down 5.3%
- June 13, 2011: 1,272, up 26% (the equivalent of yesterday’s June 11 close)
- November 6, 2012 1,428, up 42%
- November 8, 2016: 2,140, up 113% for 8 years. Up 50% in his second 4 years.
S&P 500 20 year chart
Trump’s market has increased 35% since his election
Trump was off to a good start in the first 15 months since he was elected but the market has essentially been flat in the past 16 months. Note that its run-up was in anticipation of the tax cut. It appears it was a buy the rumor; sell the news type of event.
- Day of his election: 2,140
- Day after his election: 2,163 up 1.1%
- June 11, 2019: 2,886, up 35%
To match Obama:
- November 3, 2020: 3,039, up 42%. Only needs to increase 5.3%
- November 5, 2024: 4,552, up 113%. Needs to increase 58%
S&P 500 3 year price chart
Trump’s tax cut drove the S&P 500’s earnings growth
We won’t debate the merits of Trump’s tax cuts except to point out that it will add over $1 trillion to the deficit. As you can see from the FactSet chart below, there was a major increase in the S&P 500’s earnings in 2018, going from $133.60 to $161.50 or 21%. Interestingly the stock market moved up 19.4% in 2017 in anticipation of the tax cut but was down 6.2% in 2018 when it went into effect.
S&P 500 Calendar Year Bottom-Up EPS Actuals & Estimates
The S&P 500’s earnings are projected to increase 4% in 2019 and then 11% in 2020. For 2019 the profit forecast is pretty much all in the fourth quarter, which is more likely than not exposed downwards.
S&P 500 Quarterly Bottom-Up EPS Actuals & Estimates
It also appears that 2020’s earnings growth of 11% is overly optimistic given that there are indications that the economy is slowing from the latest job report and rail traffic. The economy is about to break its record of 10 years of economic expansion which means it is getting long in the tooth and usually enters a recession when few are forecasting one.
If earnings growth falls back to mid-single digits this portion of the value equation will hinder Trump’s market beating Obama’s.
Obama benefited from multiple expansion
When Obama was elected the markets PE multiple was distorted since a large number of companies saw substantial earnings declines or lost money in late 2008 to early 2009. Using the PE multiple from the FactSet chart below of 13x in mid-2009, Obama’s stock market returns benefited from it increasing to 16x when Trump was elected.
This will be a headwind for Trump’s stock market since it will be difficult for the market’s multiple to continue to expand unless earnings growth gets back to a high-single digits to low-double digits rate or interest rates continue to fall. These two scenarios are unlikely to occur at the same time since high earnings growth should mean the economy is doing well and therefore interest rates are more likely to rise vs. fall.
S&P 500 Forward 12-Month P/E Ratios: 10 Years