The Trump Playbook: S&P 500 To 2,500 In 2017

Brace For Double-Digit Gains In 2017

The firm's analyst Jonathan Golub believes rising earnings and multiples will push equity returns into the double-digits from his previous baseline estimate of high-single-digits. Accordingly, Golub initiated a price target of 2,500, up 12.4 from its year-end 2016 target of 2,225.

Earnings Growth To Be Driver

RBC sees substantial upside potential, as the S&P 500 is up only 3 percent since Election Day. The firm believes profits will re-accelerate following two years of near zero-growth, as operating environment for financials and energy contributing to faster growth in 2017. Interest rate and inflation expectations have jumped over the past five months, the firm noted.

Estimated EPS growth (assuming 2-3 percent positive impact from Trump policies):

• 2017: +7.6 percent.
• 2018: +9.4 percent.

The Valuation

RBC Capital Markets clarified that its 2017 year-end target was based on 17.9 times its 2018 estimated earnings estimate, up from the 17.4 times multiple it had used for 2016. The firm believes multiples will advance more quickly than earnings over the near term.

Sectors Expected To Stand Out

Among the sectors faring well since the election are small caps and financials, which according to the firm are beneficiaries of the market rewarding low P/E stocks and those with higher price volatility as well as names with higher effective tax rates and more domestic business models. The firm is of the view that bond proxies and staples would remain under pressure. Economically sensitive groups such as energy, materials and industrials would outperform, the firm added.

Trump Themes

RBC listed the key themes of a Trump presidency as follows:

• Anemic recovery.
• Reflation setting in.
• Pro-growth policies.
• A new investment regime/market leadership.

Pro-growth policies, according to the firm, include cut in corporate taxes (expected to boost bottom lines by 5–7 percent annually), de-regulation (financials being the biggest beneficiary), fiscal spending (seen to have delayed impact on growth) and increase in consumer spending (corollary of higher wages and fall in wages).

At the time of writing, the SPDR S&P 500 ETF Trust SPY had risen 0.68 percent on the day to 221.18.