“The reason our stock market is so successful is because of me,” U.S. President Donald Trump bragged to reporters last month. There is no arguing that markets have been buoyant since his election thirteen months ago: the S&P 500 index is up 28 percent. But is the president right to credit himself?
A wider and closer look at the numbers shows he is not. With the exceptions of a post-election bump, subsequently reversed, and the recent boost from Republican tax cut legislation, which the president has merely cheerled from the sidelines, the markets have done no more than reward U.S. stocks for riding the coattails of global growth.
How do we know? In order to evaluate the president’s role in changing the valuations of U.S. companies, we analyzed stock prices statistically to extract the market’s expectations of earnings prospects around the world. Comparing movements in earnings expectations between the United States and other nations allows us to gauge to what degree the U.S. market actually stands out. After accounting for observable differences in extraneous factors that affect stock prices in each national market, such as the cost of equity capital and current corporate earnings, here is what we found.
Right after Trump’s election in November 2016, the market’s expectations of U.S. corporate earnings growth reflected in U.S. stock prices—so-called implied earnings growth (IEG)—soared, as shown in the figure above. Meanwhile, IEG on stocks in the rest of the developed world (Australia, Canada, the eurozone, and Japan) continued upward at the same milder trajectory it had been on since July that year, following the United Kingdom’s Brexit referendum. Since U.S. IEG had moved in lockstep with the developed world average to that point in the year, the post-election deviation suggests that investors were indeed sanguine about prospects for growth-friendly policy change in the United States. But this divergence was short-lived.
U.S. IEG plateaued in December and, as it became clearer that the president’s policy agenda was stalling, began declining in early 2017. Infrastructure spending was going nowhere; the president’s relations with Congress were souring. There was the looming prospect of a trade war with China and the North American Free Trade Agreement partners. So despite rising stock prices, IEG actually fell fairly steadily into the summer. By May of this year, the post-election U.S. IEG increase was no greater than that for the rest of the developed world. That is, the “Trump effect” on stock prices was precisely nil: the U.S. market under Trump had done no better than its peers abroad. Investors loved Canadian stocks, European stocks, and Japanese stocks just as much, even though the policy agendas under which those companies operate are very different from those in the United States.
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