S&P 500; US Indexes Fundamental Forecast – April 21, 2017

The major U.S. equity markets closed sharply higher on Thursday as investors reacted to strong quarterly earnings reports and upbeat comments about tax reform by U.S. Treasury Secretary Steven Mnuchin.

In the cash market, the benchmark S&P 500 Index closed at 2355.84, up 17.67, or +0.75%. The blue chip Dow Jones Industrial Average finished at 20578.71, up 174.22 or 0.85% and the tech-based NASDAQ Composite settled at 5919.84, up 56.81 or +0.96%.

Early in the session, the markets were underpinned by a strong recovery in Goldman Sachs stock which was down sharply earlier in the week and American Express. The two stocks contributed the most gains. AE stock rose on better-than-expected first-quarter earnings.

Early gains may have been capped by a poor performance by Verizon. Its stock fell after the company missed the mark on both earnings and revenue.

Railway company CSX also helped boost the major indexes after it said it expects profit to jump 25 percent this year. Steel stocks also rose after President Trump said he directed the Commerce Department to prioritize a probe on foreign steep products’ effect on U.S. national security.

Although the major indexes have shown pockets of weakness this week, sellers could break through key support. Instead, longer-term investors kept coming in on weakness as they approached key value zones. Most of this buying was related to positive earnings expectations.

According to FactSet, as of Thursday afternoon, 79 percent of 82 S&P 500 components that had reported quarterly results topped earnings-per-share estimates, while 70 percent have topped sales expectations.

Stocks were also supported late in the session after Treasury Secretary Steven Mnuchin said the administration was close to “major tax reform.” Mnuchin also said the Trump Administration will unveil a plan “very soon.”

Forecast

While we expect positive earnings to continue to support the current rally, there are some geopolitical developments that may cause the market to pause on the upside.

Firstly, there are developing concerns over the French elections and the possibility of an escalation of military activity over North Korea.

In France, for example, an attack in central Paris, claimed by militant group Islamic State, could bolster Marine Le Pen’s odds in the first round of France’s presidential election. Thursday’s assault on French police officers could reinforce security as the dominant theme on voters’ minds before the polls open on Sunday.

Le Pen has campaigned strongly on security and called for an outright halt on immigration as a means to prevent radicalized individuals from entering Europe. Although a recent poll showed centrist candidate Emmanuel Macron was set to win the election, Thursday’s shooting could push Le Pen into the lead.

In an earlier speech, Le Pen has claimed she will “protect France” with a vow to suspend immigration and defend the country against the threat of “savage globalization”. She also said, “We are not a free country if we cannot control our territory.”

Le Pen also urged the government to immediately restore state borders and expel foreigners monitored by surveillance after a suspected terror attack in Paris…

Over in Asia, Senior U.S. defense officials say they have seen a greater amount of bomber activity in China hours after North Korea warned Beijing that a nuclear test would be conducted on April 20^th. If the situation over North Korea escalates then look for stocks to plunge as investors move money into the safety of gold and the Japanese Yen.

Finally, President Trump is expected to sign multiple “financial related” executive actions at the Treasury on Friday, sources told CNBC. The orders are expected to deal with Dodd-Frank. One of Trump’s campaign promises was to relax banking regulations so this news could have a positive effect on prices.