Nothing, it seems, can puncture the optimism that has gripped Wall Street.
The US sharemarket wobbled briefly last week as investors worried that the stunning defeat of the Republican Party's healthcare overhaul could imperil the rest of US President Donald Trump's pro-business agenda, including his promised tax cuts and $US1 trillion ($1.3 trillion) in investment in roads, bridges and other infrastructure.
But by the end of the week, investors were reassuring themselves that Trump's decision to shelve the healthcare changes meant that he'd be able to quickly move ahead with his planned tax reforms, which include slashing the corporate rate and making it easier for profits that US corporates hold overseas to be distributed to US shareholders in the form of higher dividends or more stock buybacks.
And they dismissed the suggestion that Trump's humiliating failure to deliver on his promise to repeal and replace Obamacare could jeopardise his ability to implement other key parts of his pro-business agenda. After all, tax cuts, which shower substantial financial benefits on voters, are a much easier sell than difficult healthcare reforms, which involved removing benefits. And Republicans broadly endorse Trump's plans to introduce "massive" tax cuts.
But the expectation of sizeable corporate tax cuts isn't the only factor behind the US sharemarket's 10 per cent bounce since Trump's election. Investors also expect that the pick-up in US economic activity, and the more benign global economic backdrop, will translate into a continued recovery in US corporate profits.
Indeed, a number of analysts are tipping that the first-quarter earnings reporting season, which is due to begin in a few weeks, will show that US companies enjoyed a solid pick-up in profits in the first three months of the year as sales rose while wages growth remained muted.
The problem is that this bounce is likely to be shortlived. After a strong rise in the first quarter of the year, earnings growth is likely to slow as higher interest rates start to weigh on housing and construction, while the US dollar dents export earnings. In this environment, unless Trump is able to quickly deliver his promised tax cuts, they warn, investors are likely to become increasingly skittish by mid-year.
Unfortunately, there's little prospect that Trump will score a quick victory on the difficult issue of tax reform. Indeed, some analysts fear that investors are showing a dangerous political naivety in turning a blind eye to the deep fissures within the Republican Party. In particular, they warn, investors are ignoring the potential for a major showdown as many Republicans – who have long insisted that any changes to the tax system must be revenue neutral – take issue with Trump's ambitious tax cuts.
Analysts point out that by blocking Trump's healthcare changes, hardline Republican conservatives missed the opportunity to slice hundreds of billions of dollars from the US budget deficit. What's more, right-wing conservatives in the Freedom Caucus have already voiced their opposition to a key plank in the Republican tax reform agenda – the Border Adjustment Tax – which was expected to generate more than $US1 trillion in revenue.
If the White House bows to pressure to drop the BAT – which would introduce new taxes on items imported into the US – it is left with a huge problem: how to pay for its massive tax cuts without triggering a huge blowout in the US budget deficit.
One alternative would be to disappoint investors by watering down the tax cuts, making them far less generous than previously advertised. The other would be to attempt to bridge the schisms within the Republican Party that were responsible for last week's healthcare defeat, and to build solid and widespread support for major tax reforms.
The problem is that the healthcare debacle exposed Trump's political shortcomings, particularly his inability to forge strong coalitions and placate political opponents. And there's little doubt that Trump suffered significant political damage as a result of the decision to shelve the healthcare overhaul, a setback for a President who has so often flaunted his deal-making prowess.
