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Trump tax cuts could boost earnings by 20 percent next year: Yardeni

A noted Wall Street veteran has hiked his earnings forecast for 2017, citing a much more business friendly environment under the incoming administration of President-elect Donald Trump.

Even though the Dow Jones Industrial Average and S&P 500 Index have already jumped soared since the November 8th presidential election, economist Edward Yardeni argued that stocks are actually not overvalued. He said that notion is one of the biggest misconceptions in the market, and it could mean even bigger gains for the market.

"I now think that earnings instead of being up eight percent, it could be up closer to 20 percent. That's the kind of impact the substantial tax cuts could have," said Yardeni, president of Yardeni Research recently on CNBC's "Futures Now."

"It may not happen until the summer or fall. The question is: Will it be retroactive? I think it will be retroactive," he added.

The historical gains could just be beginning.

"As soon as Trump won, the markets started to rethink whether he was bullish or bearish, and very quickly concluded he was bullish because of his economic program. Not only that, he came in with a majority in both houses of Congress which increases the chances they'll get his tax cuts passed," said Yardeni.

"I think it's a good bet."

'Radical change'

The prediction is coming from a market watcher who is credited with coining the phrase 'bond vigilantes' back in 1983. It refers to investors who want higher yields for government bonds as compensation for rising inflation.

The combination of a GOP White House and Congress is being widely interpreted by investors to mean less regulation, lower taxes and supportive of growth.

Yardeni agreed with that assessment, especially given Trump's embrace of business executives with little to no government experience for cabinet positions.

"I think we shouldn't underestimate how radical this change is going to be," he said.

"Love it or hate it, it's going to be quite dramatic and a government of deal makers as opposed to a government of shall we say 'community organizers' is going to be a radically different kind of regime. And, I think the market likes it," Yardeni added.

Yardeni has been a bullish since March 2009. Since then, the S&P 500 has surged more than 150 percent. His S&P price target for 2017 is 2400 to 2500, a six to ten percent upside from current levels.

To make the most of potential market gains in 2017, Yardeni recommends stocks in the consumer discretionary and financial services areas.

"Financials have had a great move, but they were extremely disliked — hated even. And, they were big laggards."

Now, however "I think there is still more room in the financials. I could see the ten-year bond yield getting to three percent next year," said Yardeni.

"A three percent bond yield certainly would indicate a stronger economy and that would mean the yield curve would continue to steepen. And a steepening yield curve is usually a sign of better growth and it's great for the financials," he added.

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