Earnings: Win, Place and Show

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Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.

As tax reform moves forward, investors are jockeying for position, rotating in and out of stocks and sectors, trying to determine the biggest beneficiaries of the potential tax plan. The tech sector is taking it on the chin because these companies generally have the lowest effective tax rates and therefore lower potential gains. The consumer, financial, and healthcare industries - on the other hand - generally pay higher tax rates. Value vs. growth has also been added to the mix with value expected to outperform growth. And bets are being made on small caps vs. large caps, with small caps expected to outperform due to their more domestic orientation and the limitation anticipated on pass-through tax rates. Although some businesses will be bigger winners than others, the winnings will be widespread. In fact, S&P 500 earnings are expected to surge by 6-10% in 2018 due to tax reform. Earnings are the fundamental driver of markets, so investors want to make sure they stay in this horse race. In addition, ensuing economic growth will help not just earnings but consumers, manufacturing, jobs, housing and confidence. In the meantime, all the uncertainty surrounding the tax plan specifics could spook markets and cause a surprise volatility spike. Investors should always remember this and try not to get too complacent in the saddle. To learn more about market volatility, please see the chart on page 26 of the Global Perspectives™ book.

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