The Trump Rally Can Extend Into 2017
It is looking likely that President Elect Donald Trump will preside over a continuing US expansion that could take its place as the longest among American business cycles, there are industry experts that predict that by the time Donald Trump takes office in January, the S&P 500 Index will mark 2,250.
Investors are under-appreciating the “much higher chance now of a long lasting economic expansion that rivals the 10 year U.S. record,” one strategist wrote “We’re more confident now that the S&P will reach 2,500 in Y 2018 before suffering its next Bear market.”
The longest US expansion on record stretched from Y 1991 until Y 2001, a span of 120 months. That streak will be broken if the US economy makes it until Y 2019 without a recession.
The structural decline in potential growth means that it does not take as large a negative shock as it used to in order to precipitate a downturn in US activity.
On the other hand, the rising portion of retirees on Social Security increases the stickiness of consumption, dampening the variability of the largest component of GDP.
The important things for investors to focus on are lower taxes and the increase in bank profitability, bank (the financial) always lead a Bull market
Deutsche Bank (NYSE:DB) estimates that the US corporate tax rate will be cut to about 25%, which would bring it in line with the Organisation for Economic Co-operation and Development (OECD) average, and suggests that every 5% cut lifts the EPS (earnings per share) of S&P 500 companies by a cumulative $5.00.
As such, the DB analyst upped his earnings per share target for the S&P 500 to “at least” 130 for Y 2017, which would constitute annual growth of over 9%, assuming his Y 2016 estimate of 119 is on the mark. “We are unsure how much the US corporate tax rate will be cut, but we think a significant cut is likely,” the strategist wrote.
In the absence of measures to encourage the repatriation of profits held overseas, this corporate tax reduction would provide the most benefit to domestically-oriented companies.
The Russell 2000 Index has massively outperformed the S&P 500 since 8 November.
A special repatriation tax holiday could further buoy financial asset prices, particularly if the proceeds were used for share buybacks, dividend boosts, or M&A.
But, bonds will not become attractive enough of an alternative to crimp stock valuations or cause companies to face higher interest expenses. The continuation of the Fed’s tightening cycle will keep the labor market from overheating and put a cap on the longer end of the US Treasury yield curve, he added. As such, he recommends that investors in need of income should turn to utilities stocks, which have been battered since the election.
“Utilities benefit from: 1) a lower US corp tax rate given nearly 100% US profits and thus no foreign exchange risk, 2) likely continued 15 percent tax rate on dividends versus income tax rates for interest income and the 3.8% Affordable Care Act (ACA) tax is likely dropped, 3) more Federal infrastructure grants and loans for transmission upgrades, 4) a safe haven for retirees and institutions looking to reduce fixed income exposure,” he concludes.
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