US equities markets may have been closed on Monday for President’s Day, but that didn’t stop two of Wall Street’s biggest beasts issuing analyst notes for traders to chew over.
First came Goldman Sachs, with a warning that US Federal spending was moving into “uncharted territory”.
It cited Federal spending, rising yields and surging debt as a major concern – that could combine to drag down US economic growth.
Then came BlackRock, which upgraded its outlook for US shares after it said companies reported robust growth in the fourth quarter that was 15 per cent higher than the same time a year earlier.
It said estimates for 2018 suggest US companies will report earnings growth of between seven and 19 per cent.
Is BlackRock being overly optimistic about corporate earnings in 2018? Perhaps, but at the same time the White House’s tax reforms should boost earnings and reduce corporation tax bills. This should theoretically allow corporate America to invest in growth, which should lead to a period of strong economic expansion.
But at the same time Goldman is also right to be concerned about how this growth will ultimately be fuelled.
The level of overall US government debt is already eye-watering to say the least.
Total US government debt now stands at $20.7 trillion, or roughly 104 per cent of US GDP.
It has also doubled since 2000. So large has the US debt bubble grown that the Trump Administration’s director of National Intelligence, Dan Coats, told Senators it had become a security concern.
Adding more Federal debt to fund a tax cut and infrastructure spending may not, Goldman warns, trigger the higher level of consumer spending that supporters hope will drive US economic growth.
Such hypothetical wrangling about the future course of the US economy matters because American growth benefits us all.
Bears v bulls
Goldman noted the US Federal deficit would reach 5.2 per cent of US GDP growth by 2019.This isn’t much bigger than the US Federal deficit was in 2008.
But with the total debt level now at a new record high, the message from Goldman is pretty clear. It thinks the benefit to the economy from the tax cuts may not last that long – or be strong enough – to justify borrowing at such levels.
In truth, neither BlackRock nor Goldman can be sure what impact the White House’s tax cuts or infrastructure spending will have on the economy. But with US debt reaching record highs, calls to rein it in will only grow louder.
Both analyst notes seem to sum up the mood on Wall Street at the moment. Some of the massive swings on the Dow Jones earlier this month were described as being a direct result of a battle between the bears and the bulls.
Right now US equities markets appear to be very evenly divided between both camps.
That will mean more market volatility until there is more data to work with.
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