The market took off on news that John McCain, many of whom thought as an entrenched ‘no vote,’ would support the Senate tax bill. There is no doubt investors are clamoring for lower taxes because it means bigger earnings per share results, and earnings are the ultimate key to market valuation.  Moreover, this gives businesses room to hire workers and make greater long-term investments.

However, I continue to urge investors and would-be investors to understand that the most important driver of this rally is a reawakening of the American DNA. Its historical inclination is to lead and excel.  It’s not a political comment to say corporate America spent the past eight years in a foxhole, while the American consumer played it close to the vest after losing confidence.

One way to measure consumer confidence is corporate revenue growth, which has been in a tailspin since 2011 (as five of the last seven quarters coming into 2017 saw declines).  That is changing big time.  In the second quarter, the S&P revenue grew at 4.3%; with 98% of names reporting for the third quarter, that number has accelerated to 5.8%.

Then we move down the income statement to earnings, which can be impacted by many things, including corporate buybacks, and of course, taxes.  Last quarter, 74% of companies beat on the bottom line for a blended rate of 6.3% (or two times more than expected). Currently, Wall Street anticipates an even more robust revenue and earnings growth going into the first half of 2018.

Quarterly Period	Revenue	Earnings
4Q 2017	6.3%	10.0%
1Q 2018	6.5%	10.6%
2Q 2018	6.3%	10.2%

 

This is before the GOP tax plan is implemented.

Take a look at yesterday’s winners; it reflects renewed Main Street enthusiasm and underscores the magic that could come with a sharp reduction of the tax reform:

Retailers

Kroger (KR) posted financial results that wowed investors with strong comparable-store sales, sending shares up 6%.

Costco (COST) comparable-store sales, excluding gas, are up a very impressive 8.4% in the United States.

Both retailers paid an effective tax rate of 32.8% last year.

Transportation

Transportation enjoyed a strong session.  The biggest winner in the Dow Jones Transportation Index (DJT) was Southwest Airlines (LUV), up 3% for the session. Last year, the company paid an effective tax rate of 36.7%.

Financials

A combination of moderately paced interest rate hikes and the stronger economy will help money center banks as well as regionals. Yesterday, Goldman Sachs (GS), (+2.6%) paid an effective tax rate of 28.2%.

Bottom Line

We are in the midst of a manufacturing renaissance and the economy is on a roll. It’s not going to stop even if Republicans snatch a defeat from the jaws of victory - which they won’t.  

Volatility could increase and there could be selling on the news, but the investment proposition goes well beyond the tax reform.  America is back, and this rally in my mind has a long way to go.

Today’s Session

Equity futures took their cue from the latest miscue by senate republicans which saw the tax bill derailed by a few members with intransigent positions.  Now broad indices are moving toward a positive open as fence-sitters Johnson and Daines have joined the ‘yes column.’

Word is the Senate now has the votes but this is still a nail-biter.

Meanwhile, I’ve been a big fan of dirty fingernail industries from construction to manufacturing and we’ll get data in both areas after the opening bell.  

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