Forget tax cuts — there’s another clear reason stocks look unstoppable

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• The effect of tax cuts on the stock market is being overstated as the S&P 500 continues to hit record highs, according to Credit Suisse.
• Looking at two performance measures, the firm says it’s clear that the market’s torrid rally is instead being driven by two tried-and-true catalysts: earnings growth and economic strength.

It’s easy to look at the timing of the stock market‘s blistering move to record highs and assume that Republicans’ tax law is to thank.

Credit Suisse is here to dispel that idea.

Sure, it’s a convenient reason, and one that makes some sense — but Jonathan Golub, the firm’s chief US equity strategist, says the torrid rally is being driven by good old-fashioned earnings growth and economic strength. And he has the charts to back it up.

The first chart shows year-to-date equity returns by region, with emerging markets leading the way. “If taxes were the driver,” Golub says, “the US would be outpacing other regions.”

Credit Suisse

The next chart provides a breakdown of stock performance by industry, with non-interest-rate sensitive sectors like consumer discretionary, healthcare, and tech leading the way. Golub says that if the stock market’s strength were being spurred by taxes, “sectors benefitting more from tax changes (e.g. energy and discretionary) would be leading sectors with smaller tax burdens (e.g. healthcare and tech).”

Credit Suisse

With Golub’s arguments in mind, it’s important to note that one of the true drivers he cites — profit growth — has been the foremost contributor to equity strength during the 8 1/2-year bull market. It’s a tried-and-true catalyst for further gains, and if Golub is correct, that’s actually good news for the longevity of the streak of new highs.

Further, the stock market’s latest batch of records has come as earnings season gets underway, and Morgan Stanley argued recently that upward profit revisions were also underpinning equity gains. No matter how you look at it, recent strength comes down to one core driver: corporate fundamentals.

“Fundamentally driven rallies are far more sustainable,” Golub said.