Despite the record-breaking highs in the S&P 500, Dow Jones industrial average and Nasdaq indexes on Friday, not everyone on Wall Street is convinced that the surge will last, and some are urging caution.
"We see major risks looming, particularly around tax and trade policy" and "a significant risk of an uncertainty shock," writes Ethan Harris, chief global economist at Bank of America Merrill Lynch in his latest Liquid Insight commentary. "We recommend caution until the policy fog dissipates."
Andrew Adams, research associate at Raymond James, is "a bit skeptical" about the stock market rally near term despite the breakout above 2,300 for the S&P 500 on Thursday. "The upside still feels limited without some sort of pullback, and there are some other red flags under the surface that may suggest this recent action is already nearing exhaustion."
On tax policy, Harris is concerned about proposals to eliminate the business tax deduction for interest payments, the immediate expensing of capital investment rather than depreciation over time and border adjustment of taxes.
Under a border adjustment tax policy, companies that import raw materials could no longer deduct the cost of those imports from their taxable income, while companies that export would not be taxed on the revenue earned from those exports.
(Related on ThinkAdvisor: Trump Inaugural Speech Ignites Fear of Trade War)
Major changes in trade policy, however, are "perhaps the biggest source of uncertainty," writes Harris.
"Anything that stymies a U.S. company's ability to do business abroad would not be good considering 44% of S&P 500 revenues come from overseas," writes Jeffrey Saut, chief investment strategist at Raymond James, referencing J.P. Morgan. "With an economy nearing full employment, too, there is a chance the expected stimulus measures may have limited impact on GDP growth while increasing inflation, which could force the Federal Reserve to raise rates more quickly than the market wants."
