How US can lead stockmarkets to new record in 2018

Despite President Trump's best efforts to ruffle the feathers of America's allies, there's little sign that Wall Street has become too rattled by this new and potentially significant chapter in the Trumponomics story.

Under the headline "It's Late, but the Party's Still Going", a report from Barclays strikes a cautiously optimistic tone on prospects for US equities over the rest of 2018. It believes the S&P 500 Index has the potential to reach 2,900, which would be marginally higher than the record set in January this year.

Given the old market saying that when Wall Street sneezes the rest of us catch a cold, that can be no bad thing. European markets, for example, continue to defy the doom-mongers, despite the continent being on the receiving end of Trump's pro-American trade and fiscal agenda.

Following on from January's tax cuts, this aggressive stance on trade negotiations has garnered support from many in corporate America. But Wall Street is clearly betting that there won't be an all-out trade war that could potentially offset the positive fiscal stimulus from tax reform.

Source: interactive investor          Past performance is not a guide to future performance

Barclays described the government and fiscal policies undertaken by the Trump administration and global policymakers as "both a blessing and a curse for U.S. equity markets".

They wrote:

"While the first three arrows of Trumponomics - tax cuts, fiscal expansion, and deregulation - have been clearly pro-growth, the fourth arrow - trade barriers - has the potential to negatively impact growth."

Barclays said industrials and energy stocks were particularly vulnerable to a potential trade war, although other sectors are still benefiting from government policy.

Deregulation has continued to be a positive tailwind for financial stocks, while the fading of political rhetoric on drug pricing this year has become a positive catalyst for U.S. healthcare companies.

Significantly, Barclays analysts think that we are only just entering the late stage of the business cycle after nine years of global expansion.

This is based on their view that leading indicators of recession are flashing amber but not red, with no sign of industry-specific cycles turning just yet.

They added:

"We note that although the current expansion has been long it has not been very strong and the output gap -  the difference between potential and actual GDP - has just closed. The mini industrial recession in 2015-16 also probably vented some steam."

The report notes that corporate debt is high but can be easily serviced, while it also challenges the popular assumption that higher rates are bad for equities.

Overall, the bank has an overweight rating on financials, healthcare and info-tech stocks, with an underweight stance on consumer discretionary and utilities. It is market weight on materials, consumer staples, energy and industrials.

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