Wall Street is ignoring two catalysts that could propel stocks higher

While markets are busy with Trump tweets and geopolitics, one strategist says two catalysts are being left by the wayside.

Economics and earnings will give stocks their next leg up this year, according to Kate Warne, investment strategist at Edward Jones.

"We think first investors really aren't paying attention to the fact that the budget deal that went through Congress earlier this year adds government spending as a pillar for economic growth," Warne told CNBC's "Trading Nation" on Tuesday.

President Donald Trump's election lifted hopes of increased infrastructure spending, deregulation and possible tax cuts.

"What wasn't expected was Congress would reach a deal that instead of keeping deficits at a relatively constant level, that we'd actually see deficit spending increase especially so late in the economic cycle," she said. "That is a surprise compared to what was baked in."

Trump signed a $1.3 trillion spending bill in March that bumped defense spending up by $80 billion and increased domestic spending by $63 billion.

"That's part of why we expect slightly stronger economic growth later this year," said Warne. "I don't think it's really been taken into account because we don't know where the government is going to spend."

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Equities markets should also be able to overlook rising deficits, at least in the short term, Warne said.

"I think that will be a problem in the future, but I don't think that's a problem short term, and that's really where we're focused right now, which is what happens in the rest of 2018 and early 2019," she said.

Increased government spending is expected to push annual deficits to $1 trillion by 2020, according to an analysis by the Congressional Budget Office. In the shorter term, Warne expects the spending to boost economic growth to around 3 percent in 2018, higher than her 2.6 percent estimate before the budget deal passed.

"We should expect faster economic growth later this year. It's not going to be a dramatic change but it's enough that should propose a catalyst for stocks," said Warne.

Earnings, Warne's second catalyst for stocks, have presented a conundrum to market watchers expecting a big rally — double-digit profit growth that would normally result in gains has not.

"Investors haven't paid enough attention to the really stellar first-quarter earnings we've seen," said Warne. "Companies have been beating by a percent that's higher than average. With 20-plus percent earnings growth expected, some of that was baked in."

S&P 500 companies have reported nearly 26 percent blended earnings growth over the first quarter, according to Thomson Reuters. Of the four-fifths of the index that have reported, 79 percent have topped estimates, well above the long-term average of 64 percent.

The problem, Warne said, is that investors have shifted from celebrating good news to fretting over potentially bad news.

"Investors have begun to focus on what could go wrong rather than what continues to go right," she said. "Whether it's higher interest rates or concerns about nuclear deals in the rest of the world or geopolitical risks, trade disruptions, I think those are the things that investors are more focused on."

The S&P 500 ended Tuesday's session flat after Trump pulled the U.S. out of the Iran nuclear deal. The benchmark index is less than 10 points above where it started the first-quarter earnings season.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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