Goldman & JPMorgan Bullish On Stocks Under Trump, With Bond Caveat

Goldman and 'Gandalf' Are Bullish on U.S. Stocks Under Trump
Tax reform to help drive better financial performance.

by Luke Kawa, Julie Verhage and Joanna Ossinger

Who thinks President-Elect Trump will be good for U.S. stocks? Goldman Sachs Group Inc. and the JPMorgan Chase & Co. strategist known as 'Gandalf,' to name one high-profile pair.

A Goldman team led by Equity Strategist Benjamin Snider highlighted the potential for corporate tax reform as a major tailwind for the financial performance of Corporate America. “Each percentage point change in the effective U.S. corporate tax rate is worth about $1.50 of 2017 S&P 500 earnings per share [EPS],” the team writes. “A change in the effective tax rate to 20 percent from the current 26 percent would boost our EPS forecast by 8 percent to $125." This would represent year-over-year growth of 20 percent, or double their current expectation.

Appetite for U.S. stocks has been immense since the election. Two-day inflows into the SPDR S&P 500 exchange traded fund, the largest ETF by assets, hit their highest level in over a year on Thursday. After slumping as the election results started to roll in, the front-month S&P 500 futures contract jumped nearly 7 percent from trough to peak on Wednesday.

Another benefit to U.S. stocks that Goldman sees is an increase in buybacks, also linked to changing tax policy under Trump. Historically, when there is a repatriation tax holiday like the one Trump discussed on the campaign trail, firms have used cash brought back from oversees for share repurchases, which has been a huge source of net demand for stocks throughout this bull market.

JPM Global Head of Quantitative and Derivatives Strategy Marko Kolanovic, meanwhile, has long disagreed with the overwhelming consensus that a Trump victory would be negative for markets. But the extent of investor enthusiasm since the election has caught the strategist off guard.

"The previously quoted (though often overblown) risks of Trump's presidency are now likely higher, not lower," writes Kolanovic, who was likened to the Lord of the Rings wizard after his prescient calls on related to the Chinese devaluation of 2015. "While we think that Trump’s win is medium-term positive for equities, we are not fully out of the woods yet." 

At this point, the markets appear to have been more fixated on the aspects of a Trump presidency that could be positive for growth, like new infrastructure spending and tax reform, than the potentially detrimental aspects, like limits on immigration and trade protectionism.

"As we advocated in our previously published research: emerging market assets, Commodities, Gold and Value stocks should outperform, and USD, Bond proxies and Quality should underperform," writes Kolanovic. "This long term trend, which is reinforced by Trump’s win, is ‘cautiously optimistic reflation,' rather than a ‘full risk on’ and ‘hawkish Fed’ trade."

Goldman's team added that the bond market selloff could limit the extent to which stocks rise due to the regime change.

“Historically low rates lifted U.S. equity valuations to near-record highs, and if risk-free rates continue to rise they may result in lower equity valuations,” concludes Snider.

Courtesy of bloomberg.com