Forget tax cuts — there's another clear reason why stocks look unstoppable

January 22, 2018 at 09:09 AM EST

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The effect of tax cuts on the stock market is being overstated as the S&P 500 continues to hit record highs, according to Credit Suisse.
Looking at two performance measures, it's clear that the market's torrid rally is instead being driven by two tried-and-true catalysts: earnings growth and economic strength, the firm says.

It's easy to look at the timing of the stock market's blistering move to new records and assume that the GOP tax bill is to thank.

Credit Suisse is here to dispel that idea.

Sure, it's a convenient reason, and one that makes some sense — but Jonathan Golub, the firm's chief US equity strategist says the torrid rally is being driven by good, old-fashioned earnings growth and economic strength. And he has the charts to back it up.

The first chart shows year-to-date equity returns by region, with emerging markets leading the way. According to Golub, "if taxes were the driver, the US would be outpacing other regions."

The next chart provides a breakdown of stock performance by industry, with non-interest rate sensitive sectors like consumer discretionary, healthcare, and tech leading the way. Golub says that if the stock market's strength was being spurred by taxes, "sectors benefitting more from tax changes (e.g. energy and discretionary) would be leading sectors with smaller tax burdens (e.g. healthcare and tech)."

With Golub's arguments in mind, it's important to note that one of the true drivers he cites — profit growth — has been the foremost contributor to equity strength during the 8 1/2-year bull market. It's a tried and true catalyst for further gains, and if Golub is correct, that's actually good news for the longevity of the current streak of new highs.

Further, the stock market's latest batch of records has come as earnings season gets underway, and Morgan Stanley argued recently that upward profit revisions are also underpinning equity gains. No matter how you look at it, recent strength comes down to one core driver: corporate fundamentals.

"Fundamentally driven rallies are far more sustainable," said Golub.

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