The stock market has been skyrocketing since the election of Donald Trump. The new economic platform and supposed economic policies have increased investors’ interest in the US stock market. Those who have already invested in the stock market when the prices were low could enjoy great gains in the current economic conditions. If you have shares ready for selling, now is the right time as the stock market is thriving. However, those investors who are trying to get their market share in the current stock market may not be able to enjoy gains in the future.
Donald Trump’s proposal to reduce regulations, slash corporate and personal taxes and invest $1 trillion in infrastructure were received well by the Wall Street. The POTUS is regarded as the epitome of growth inducing revolution. The stock market resembles a raging bull going higher with DOW index reaching 21,000 and beyond. The increased economic growth rate has kept the market optimistic so far. The problem now is that investors have made it imperative for corporate establishments to excel in everything to provide true rewards to shareholders.
The S&P index has increased by 11.3%, increasing the total market cap to $21.6 trillion from $19.1 trillion. The investors have to pay more for their shares. The price-earnings multiple (P/E) has increased to 25 from 22 last year. In 2016, S&P generated $865 billion. The increase in P/E means that the dividend yield has gone down to 2.0% from 2.3%. Investors have to purchase expensive shares to enjoy the same payments.
Now that the S&P index has gained $2.5 trillion, the corporate companies must increase their earnings fast to provide the same dividend payments for their investors. Before the election when the P/E was at 22, the corporate companies must generate at least 5.7% gains to provide 8% annual return to the investors. In the current scenario, the gains must be at least 6% to match the demands of the investors. In a nutshell, the market must increase earnings by 15% per year to provide 8% annual return that the investors expect at a minimum.
The earnings for investors per share are likely to be affected by various possibilities. In the upcoming years, the companies may have to face dilution and selling too many shares would affect the investors who have already invested. The top executives may need more options and new challenges may make it difficult for the industries to raise the stock price rapidly. The 2% inflation rate should also be incorporated in the present scenario.
According to Trump, the economic growth rate of 4% is achievable and sustainable. The experts don’t agree with it. Even if Trump manages to bring the growth to 3% to 4%, the industries must still increase their earnings by 9% annually to compensate the inflation. Accelerated economic growth would only make it possible to increase earnings by 6% and the loss in earnings will become a burden for the investors. The bulls are betting that the already increased profits will outgrow the economy when the economy grows at double the current pace.