Trump rally may drive S&P 500 to 2,500: RBC

POTENTIAL UPSIDE

ARMINA LIGAYA The Trump-fuelled market rally isn’t over yet as the S&P 500 still has “substantial potential upside” and could hit 2,500 next year, according to RBC Capital Markets.

“Interest rates and inflation expectations have jumped over the past five months on the back of a tight labour market and the promise of Trump’s pro-growth policies,” RBC’s chief equity strategist Jonathan Golub told clients in a note on Monday.

“While the market’s recent rotation might seem abrupt, the S&P 500 is up only three per cent since election day, leaving it with substantial potential upside.”

RBC has initiated a 2017 year-end price target of 2,500 for the S&P 500, up from its current target of 2,225, representing 12.4 per cent potential upside (before dividends).

President-elect Donald Trump’s victory on Nov. 8 and the subsequent surprise boost it has provided for equity markets has been driven in part by several progrowth elements of his platform.

This includes the billionaire’s plans to cut corporate taxes from 35 per cent to 15 per cent, offer a one-time tax holiday to allow U.S. firms to repatriate cash at 10 per cent, cut personal income taxes as well as deregulation.

The S&P 500 closed at 2,204.71 in trading on Monday.

Other analysts have recently forecasted a rise in the S&P 500, but at more modest levels.

Citi’s chief U.S. equity strategist Tobias Levkovich has pegged the S&P 500 target at 2,325 for end of 2017.

Dubravko Lakos-Bujas, JPMorgan’s head of U.S. Equity Strategy and Global Quantitative Research, expects the S&P 500 to reach 2,400 by end of 2017, implying a nine per cent upside.

The average S&P 500 forecast was 2,317 among 11 equity strategists compiled by Bloomberg (not including RBC).

RBC forecasts that profits too will “re-accelerate” from earnings-per-share of US$119 this year to US$128 in 2017 and US$140 in 2018. The 7.6-per-cent growth in EPS is fuelled in part by a better operating environment for financials, which would be the biggest beneficiary of less-onerous regulations, and energy, Golub wrote.

By 2018, EPS will grow by 9.4 per cent, assuming a two- to three-per-cent impact from Trump’s policies, he added.

“This placeholder for changes in taxes, regulation, and spending is quite modest, in our view, as an adjustment to corporate taxes alone could easily double this impact,” Golub said in the note.

JPMorgan also has an EPS estimate of US$128 by end of 2017, but this forecast is “mostly policy-neutral” not incorporating proposed changes from a Trump administration. Its estimate is driven by “stronger revenue growth, flat margins, and continued stock repurchases.”

“This earnings upside potential of seven to eight per cent is largely driven by positive base effects from commodity-linked sectors and normalization of the U.S. and global business cycles,” Lakos-Bujas said in the Dec. 1 note to clients.

The average EPS among 11 equity strategists compiled by Bloomberg, which did not include RBC, was US$127.14. The S&P 500 index could reach 2,500 points next year if Donald Trump’s policies bear fruit, says RBC.