The fight over raising 2017 earnings has just begun

Should 2017 earnings estimates be raised? That's the heart of the debate raging among market participants right now.

Here's the problem: Even before the Trump victory, analysts had raised their 2017 earnings estimates on the simple theory that the economy would continue its modest expansion, and particularly that oil stocks would once again start producing higher profits. The cratering of oil company profits in 2015-2016 was a major reason for the S&P's "profit recession."

Analysts — who employ a "bottoms-up" methodology that looks primarily at corporate fundamentals in estimating earnings, expect the S&P to see a roughly 10 percent gain in earnings in 2017. These estimates are historically optimistic.

But that was before the Trump victory. Analysts and strategists are now struggling to quantify what — if any — boost to earnings we may see in 2017 from fiscal stimulus(infrastructure), tax reform, and fewer regulations.

Stocks are moving on an assumption that this will lead to higher earnings and GDP growth, but no one knows quite how to quantify this because we have no hard numbers.

The fight has just begun, but it's clear there is not a lot of agreement.

Take Bank of America Merrill Lynch, which on Tuesday issued a bullish note on airlines in general, raising United Continental to a "buy" and increasing the price target. Why? Because bookings are improving, but more importantly because airlines have a high sensitivity to GDP growth. On the theory that nominal GDP growth would be higher than the roughly 1.5 to 2.0 percent growth we have seen, BofA raised the revenue estimate to 3.2 percent. While they did not change their earnings estimate, the implication is that earnings could clearly go higher.

The problem, of course, is that market participants have swallowed the "Trump will expand GDP" story hook, line and sinker.

United Continental, for example, is up 15 percent since the election.

This is making a lot of traders very nervous. Nomura, for example, said that "The risk-asset rally may be halting now as speculative investors have finished adjusting their Trump-rally positions."

One Baird analyst, reviewing the 2017 prospects for industrial distributors like WW Grainger, Fastenal, and Watsco, all of which would benefit from an economic expansion and an infrastructure stimulus, admitted that some Trump optimism was "likely warranted" but after reviewing the big price run-ups since the election concluded by saying "we see minimal upside from here for most industrial-focused distributors. Our estimates are already predicated on solid improvement in 2017/2018 (despite continued weak demand and dollar strength), with valuations that we've now pushed to the high end of our comfort zone."

Pushed to the high end of our comfort zone. That about sums it up for a lot of analysts.

Then there's the whole risk that none of this will come down quite in the form — or the intensity — traders seem to think it will come down. Jaret Seiberg, Cowen's bank analyst, summarized the issue in a note today: "We believe the market continues to underappreciate risk in the Trump administration when it comes to banks, especially the mega banks. To us, there is risk to the economy, risk that tax reform does not help banks as much as expected, and risk that deregulation disappoints."

The lack of any concrete information on which to base an expansion of earnings has not stopped strategists from trying. I wrote last week about Standard & Poor's estimate on how tax cuts would help earnings.

Since then, Citigroup and JPMorgan have all taken a stab at looking at the Trump effect on earnings.

Goldman's David Kostin, at the end of last week, made a similar stab at it, but began his exercise with a classic bit of Goldman understatement: "Policy uncertainty introduces a degree of instability to our 2017 forecast that has been absent in recent years."

I'll make this simple: Kostin believes adjusted earnings will rise 5 percent in 2017 to $123, but then throws in estimates of how much earnings might be boosted by the economy, rates, the dollar, and tax policy.

Adjusted EPS (est.) $123
Faster GDP growth: +$1
Higher interest rates: +$1
Stronger dollar: -$2
Lower tax rate: +$6
Buybacks: +$1
Upside to 2017: $130

Bottom line: Instead of 5 percent earnings growth before the election, the Trump package could create 11 percent earnings growth.

When will we get real numbers — about tax reform, about repatriation of foreign earnings, about fiscal stimulus, about reduced regulations?

Kostin expects nothing concrete until March 2017 "at the earliest," expecting draft budget resolutions to be released from the House and Senate Budget Committees only toward the end of the first quarter.

That means four months of not knowing much of anything.

But that's just the beginning. The final House/Senate conference report is unlikely to be enacted before September.

September! Kostin's conclusion: "Put simply, enormous tax and fiscal policy uncertainty will exist for almost all of 2017."