Goldman Sachs analysts have a colorful take on the stock market in 2017.
“US equity investors have focused ‘more on hope than fear’ since Donald Trump’s election,” Goldman Sachs’ David Kostin said in a meaty 31-page note to clients. “Ironically, many commentators believe his campaign rhetoric focused ‘more on fear than hope.'”
Indeed, president-elect Trump’s platform appeared to leverage fear of a deteriorating economic future to sell his message of hope to make things better. In the wake of his election, the US stock market has rallied to record highs on what analyst expect — or hope — will be policies that bolster corporate profits and stock prices.
But will Trump be able to deliver on his lofty promises? And if he does deliver, will things unfold in the economy and markets as expected?
“In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear,” Kostin continued.
And so under this basic framework, Kostin and his team mapped out what he expected for the stock market in 2017.
Stock market ‘hope,’ followed by ‘fear’
Kostin forecasts the S&P 500 (^GSPC) to surge to 2,400 very early in 2017, but then slide back to 2,300 by year-end.
“‘Hope’ will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400,” he said. “The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions.”
Goldman Sachs analysts “expect no policy details will be available until March 2017 at the earliest.” And as history shows, things are never as clear cut as initially envisioned as both political and economic hurdles materialize.
“‘Fear’ is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level,” he continued. “Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H.”
Kostin expects S&P 500 earnings to climb 5% to $123. Should Trump achieve his goals for tax cuts, Kostin estimates earnings could jup 11% to $130.
In this stock market backdrop, Kostin expect cyclicals to outperform defensives during the first half of the year. As fear creeps up, he expects outperformance coming from companies with low labor costs and strong balance sheets.
Sam Ro is managing editor at Yahoo Finance.