5 THINGS INVESTORS NEED TO KNOW

Some experts say the market is overvalued as investors bet on Trump’s policies

When U. S. companies this week start telling investors how much money they made in the final three months of 2016, it will mark the final earnings season of the Obama era and usher in a period of higher expectations amid hopes the president- elect’s policies will turbocharge profits.

Upcoming profit results are important, as the stock market has run up sharply since Election Day, with the Dow Jones industrial average moving within striking distance of the 20,000 milestone.

U. S. stocks have charged higher, with some market pros saying that the market is overvalued, as investors bet on stronger profits going forward if Donald Trump’s plan to slash corporate taxes, reduce regulation and spend heavily on infrastructure comes to fruition.

“The market is already looking forward and pricing in a successful Trump program,” says Ed Yardeni, chief investment strategist at Yardeni Research. “They’re

betting a good part of his agenda will succeed and will be good for earnings.”

Five things investors need to know about fourth- quarter 2016 earnings:

1. PROFIT GROWTH IS IMPROVING. The “profits recession” ended in mid- 2016, and the outlook is improving. Standard & Poor’s 500 companies are forecast to grow profits 5.8% in the October- through- December period, which is faster than the 4.3% growth in the third quarter of 2016, earnings tracker Thomson Reuters says.

The outlook for 2017 is even brighter, with analysts forecasting profit growth of nearly 14% in the first quarter and 12% in the second quarter. Trump policies could result in full- year 2017 earnings coming in even higher than the current 12.4% estimate, analysts say.

2. ENERGY AND FINANCIALS DRIVE REBOUND. The bullish fourth- quarter profit picture is being driven mainly by two sectors: energy and financials, says Jonathan Golub, chief equity strategist at RBC Capital Markets. Energy is seen posting profit growth of 1.4%, its first positive quarter in a year and up from a 68% drop in the third quarter of 2016.

Earnings in the financial sector are expected to rise 14%, doubling growth from the prior quarter. Less regulation, more business activity and higher interest rates due to Trump’s expected policies puts banks in a sweet spot. “It’s the first quarter we don’t have any drag from the energy sector,” Golub says.

3. CEO GUIDANCE IS WILD CARD. This earnings season is all about what CEOs say about the future.

Will they boost their outlooks based on a still- uncertain policy outcome under Trump? While that would be bullish, it’s unlikely CEOs will make upbeat projections given a lack of policy specifics.

“I don’t know whether this earnings season there will be enough specificity from management to take that leap of faith,” Golub says.

4. STALE EARNINGS ESTIMATES ARE A RISK. It’s also unlikely analysts will revise their earnings estimates higher for 2017 until CEOs voice optimism that business will improve under Trump. That means the pricey stock market relative to earnings could come under pressure, as investors worry about the market getting too far ahead of itself.

5. TAX OVERHAUL IS KEY. Markets don’t need every Trump promise to happen for earnings to improve and stocks to rise, Yardeni says. Simply reducing the corporate tax rate would do the trick. “

It’s a mistake to bet against Trump,” Yardeni says.