Trump could get 'beamed into space' and stocks would be just fine

Merely posing such a question may strike some equity enthusiasts as blasphemy. After all, in the months right after the presidential election, the sectors seen as most closely tied to President Donald Trump's proposed policies — most notably financials and industrials — soared.

But an interesting wrinkle has formed. Whenever one of the plentiful negative Trump headlines hits news wires, investors are mostly unshaken. A prime example came this past week, when Trump came under the most scrutiny yet, spurring the biggest drop in US stocks since months before the election — a decline that was largely erased in just two days.

That wasn't the first piece of news seen as a potential threat to Trump's economic agenda, and it certainly won't be the last. Yet here we sit, about 1% from another record for US stocks.

It has introduced an idea that would have seemed far-fetched mere months ago: that while Trump's election victory undoubtedly boosted stocks on a short-term basis, market conditions are more than capable of supporting current valuations on their own.

"If the Trump administration disappeared or got beamed into space, I don't think the market would plummet," Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee, said in a phone interview. "The immediate postelection rally was partially composed of optimism around Trump, but a lot of the sustained strength is due to good old-fashioned data. People are forgetting that the stock market is more than just the actions of the president. "

Here's a breakdown of three themes supporting the idea that stock market would be just fine without the Trump trade:

Corporate earnings are growing at the fastest pace in 6 years.

Profit expansion has historically been the biggest contributor to share-price appreciation, and it has returned to the S&P 500 with a fury not seen in almost six years.

Companies in the benchmark are on pace to see 14% earnings growth for the first quarter of 2017, the most since the third quarter of 2011, according to data compiled by Bloomberg. It marks the third straight quarter of earnings growth for the S&P 500.

"We're all getting caught up with what Trump is tweeting on a given day, because it's easy to get caught up," Antonelli said. "But beneath the surface, economy is still going strong, and companies are doing their best to grow."

Wall Street is getting increasingly skeptical that changes to the tax code would affect corporate profits this year, yet forward earnings forecasts remain robust.

After the election, the most highly taxed companies in the US enjoyed a double-digit rally on expectations Trump would lower the corporate tax rate. During the campaign, the president suggested lowering the rate to 15% from 35%, a cut that would have an outsize impact on the profits for companies paying the most.

As it becomes increasingly clear that Trump will have difficulty passing legislation, returns for this group of stocks have leveled off but not fallen victim to a major decline. Future profit expectations for the S&P 500 are, quite simply, too strong.

"The prospect for tax reform is uncertain, but the calendar suggests a low probability of any impact on 2017 EPS," Goldman Sachs chief US equity strategist David Kostin wrote in a May 12 client note.

The tech sector, which is leading the US stock market higher, isn't as wedded to Trump policies as other areas and is benefiting from a surprisingly weak dollar.

Since the election, no sector has done more to boost US stocks than tech. It's largely because of the group's ability to expand profits. In the first quarter, tech companies grew earnings by 21%, tied for most in the S&P 500.

The group has gotten help from a surprising source: a weaker-than-expected US dollar. Because of the heavy weighting of so many mega-cap multinational companies, tech indexes are particularly exposed to overseas markets. As exporters, their bottom lines benefit greatly from declines in the greenback.

Further, stock fluctuations in the industry are less tied to Trump's policies, making them less vulnerable to negative headlines. While companies that hold a large amount of cash overseas would benefit from the president's proposed repatriation tax holiday, the industry as a whole is less directly beholden to Trump.

""Earnings growth is good, the dollar is weak, and the global economy is improving, and tech stocks are big exporters."