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It’s up to corporate America to keep the rally going

Daniel Suzuki, Bank of America Merrill Lynch equity strategist, said he doesn’t believe the Trump trade has been entirely washed out of the market. That trade, popular right after the election, boosted stocks that would benefit from tax breaks and fiscal stimulus. The trade has mostly been unwound, and if it looks like tax reform will be approved, the market should rally.

On the other hand, Suzuki does not think the market would have a negative reaction if health care fails because it is no longer as closely tied in investors’ minds with tax reform as it once was. “It doesn’t really preclude that the market would rally on the small probability that tax reform gets done,” he said. “The market as a whole doesn’t really care about health-care reform, only in the sense it’s a leading indicator of other stuff getting done like corporate tax reform.”

“There’s some concerns that we’re at an inflection point for growth,” he said. “There’s been some indicators that have been slowing, but the idea that we’re going to get a boost to corporate profits and lower taxes I think would be a boost to confidence and expectations for growth, at a time when people are looking for less growth.”

Suzuki said he is currently cautious on the market and a decent earnings season could help the market but it may also bring some bumps. “I think the problem is expectations are already pretty high,” he said. “I think if the commentary is pretty good that could be supportive of the market. The guidance itself has the potential to disappoint. Our numbers are lower than the consensus for the third and fourth quarter. There’s a potential that offsets some of the positive commentary you’ll see. I think it will be mixed.”

Suzuki said BofA is looking for value stocks to outperform growth, like tech, in the second half. He said the FANG stocks are overvalued, and are a crowded trade. FANG is made up of Facebook, Amazon, Netflix and Google’s parent, Alphabet.

Bank of America’s year-end target remains 2,450 on the S&P 500, below Friday’s close. The S&P 500 finished Friday at 2,459, up 1.4 percent for the week.

“I think there’s a lot of risk to the market, some of the growth indicators have rolled over, and leverage is high at a time when interest rates are rising. Monetary conditions are getting a little tighter. Central banks are moving toward a tightening bias,” Suzuki said.

Economists expect the European Central Bank on Thursday to leave rates unchanged, but ECB President Mario Draghi could talk about the central bank’s quantitative easing program.

Marc Chandler, chief foreign exchange strategist at Brown Brothers, said he is watching the ECB because it is one thing that could turn around the dollar’s losses in the coming week.

“Most of what they’re going to do is change the risk assessment away from increasing their asset purchases. That’s a step toward tapering,” Chandler said. “They don’t want to taper. They’re just removing the downside risk that policy has to be eased further.”

There is no major U.S. data in the coming week that could influence the market’s view of Fed policy. There is however, important retail sales, industrial production and GDP from China, released overnight Sunday.

The S&P 500, the Dow, Dow Transports and Russell 2000 all closed at record highs. The Nasdaq was about a half percent away from its high. The dollar index ended the week nearly 1 percent lower, and the 10-year Treasury yield was well below the week earlier level of 2.39 percent. It touched 2.26 percent Friday, and was at 2.32 percent late in the day.

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