News Analysis: How much more could Dow rise?

Source: Xinhua| 2017-10-19 11:06:13|Editor: Song Lifang
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NEW YORK, Oct. 18 (Xinhua) -- The Dow Jones industrial average notched the fourth milestone this year on Wednesday, as investors renewed hopes for a comprehensive tax reform by the end of this year while cheering over better-than-expected quarterly earnings.

The 30-stock index has risen more than 17 percent in 2017 so far, closing above 23,000 just 76 days after first topping 22,000. It hit this year's first milestone of 20,000 in late January, and crossing the 21,000 mark on March 1.

Analysts are not surprised by the continued bullish sentiment as market renewed hopes for a tax reform the Donald Trump administration has long promised.

U.S. Treasury Secretary Steven Mnuchin said in the "Politico Money" podcast Wednesday that the rally in the stock markets is largely based on expectations of Congress passing a major tax-relief bill.

He added that Wall Street will see significant drop if the bill does not pass.

Meanwhile, improving earnings and a strong international backdrop were beginning to overcome expectations of tax reform as the key drivers keeping valuations aloft, said Humberto Garcia, Head of Global Asset Allocation for Bank Leumi USA.

This earnings season has gotten off to a good start. Of the 52 companies that have reported earnings to date, 80.8 percent reported above analyst expectations, latest data released by Thomson Reuters showed.

In a typical quarter since 1994, 64 percent of companies beat estimates and 21 percent miss estimates, according to Thomson Reuters.

During the first two quarters of the year, earnings surged 15.5 percent and 10.8 percent respectively, according to data from S&P Capital IQ.

Garcia added that the benefits of international economic growth are revealed in U.S. equities performance in the year to date.

"While the Dow is up 17.2 percent and S&P 500 up 14.3 percent, the S&P Midcap 400 index is only up 9.9 percent and the Russell 2000 by 10.3 percent. Larger companies typically have greater exports exposure, while smaller ones are more keyed to the domestic economy and, perhaps, benefits of corporate tax reform," he said.

With all three major stock indices hovering at historic highs, investors are asking how much longer U.S. equities could rally.

Some strategists have been warning about the possible impact the Federal Reserve's move to unwind its 4.5-trillion-dollar balance sheet and raising interest rates may have on the stocks market.

The Fed has announced that it would start normalizing its balance sheet from October, marking a further step to end its loose monetary policy. The central bank also hinted that another interest rate hike might be possible by the end of this year if the economy continues moderate expansion.

Market expectations for a Fed rate hike in December rose to 91.7 percent, according to CME Group's FedWatch tool on Wednesday.

Former U.S. congressman Ron Paul said as early as August that all three major indices could lose as much as half their value within a year's time. He reaffirmed his position on Sunday, telling media that a market correction is inevitable and that the Fed might well be the cause of correction.

Garcia said that by unwinding its massive balance sheet and hiking rates simultaneously, the Fed might raise the possibility of excessive tightening, which could stifle consumer confidence and business spending.

However, he reminded investors that improving corporate profits and a buoyant international economic environment combined with benign inflation might provide a significant cushion against market turbulence.

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