Corbin: Investors Less Upbeat about Economy, But Optimistic about Impact of Trump Policies

44% of investors expect first-quarter earnings to surpass expectations.

US equities are fairly valued or even overvalued, said an overwhelming 97% of institutional investors surveyed for Corbin Advisors’ first-quarter earnings primer report. More than four out of 10 investors (44%) of expect first-quarter earnings to surpass expectations – the highest percentage since December 2013 and substantially higher than the 35% figure Corbin reported for the fourth quarter.

The Corbin survey is based on input from 83 institutional investors and sell-side analysts globally.

“Valuation is one of the toughest issues today,” said Fla Lewis, chief investment officer at Weybosset Research & Management. “If interest rates stay low, everything is cheap. On the other hand, from the historical point of view, things are on the high side of reasonable. The truth probably lies somewhere between the two, but where?”

Institutional investors are also more optimistic about organic growth in earnings, with 62% anticipating it will materialize compared to 45% for the fourth quarter, Corbin, a Hartford, Conn.-based investor relations advisory firm, reported. However, twice the number of investors as in the last quarter also expect that margins would drop.

Even though investors expect President Trump’s policies relating to infrastructure spending, tax cuts, and repatriation to come to fruition, they are less upbeat about the US economy than they were in the fourth quarter. One Trump policy they don’t expect to be implemented is his proposed “border adjustment tax.”

However, “our research indicates clear and widespread investor acceptance that Trump-based animal spirits and pro-business policy reforms will stimulate growth and extend what is already an exceptionally long recovery cycle,” noted Rebecca Corbin, Corbin’s founder and CEO.

Investors who responded to the survey also see valuations as less inflated overseas, which is why they are also interested in opportunities in non-US markets. Their sentiment on the Eurozone has picked up most substantially, with sentiment on India and Brazil following.

Institutional investors’ appetite for risk has also improved as they jettison more defensive plays in favor of higher-beta stocks. The technology and industrial sectors are also seeing more investor interest, according to Corbin, while the prospect of rising interest rates and deregulation is boosting the financial sector. Investors are most bearish on sectors where plays dominate and that could be hit by interest-rate hikes, including real estate investment trusts and utilities.   

“Valuations are lofty, especially when considering the reality that much, if not all, of the upside is priced in, even as the Fed appears poised for a series of rapid rate hikes,” Corbin said. “Thus, any stumble in policy execution will likely have significant, negative consequences. Investors are increasingly aware of these risks as indicated by our survey; however, we have yet to see this awareness manifested in their actions. Stay tuned.”

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