Goldman's Trump playbook: Market to tread water; buy banks, sell biotech pop

Published Wed, Nov 9 20162:36 PM EST

The stock market will end 2016 about 2 percent lower from current levels in the wake of Donald Trump's surprise election, Goldman Sachs predicted in a note to clients Wednesday. While the overall market will be stuck, Goldman said, bank stocks will outperform and biotech shares may disappoint. "Following several years of gridlock inside the Beltway, the potential now exists for a number of legislative initiatives to be passed," U.S. equity strategist David Kostin wrote. "Examples would include fiscal stimulus/infrastructure spending, corporate tax reform, reducing regulation and addressing rising health care costs. However, the prospect of new legislation also raises uncertainty about policy specifics and may prompt corporations to delay action until details are finalized." Financials were the best performing part of the S & P 500 with the sector jumping nearly 4 percent in value Wednesday. "The financial sector trades at a discount relative to the market and shares would benefit from a rising interest rate environment and reduced regulatory oversight," said Kostin. Health care stocks were the second-best performing part of the market Wednesday, rising more than 3 percent as biotech shares popped in a relief rally that Hillary Clinton wasn't elected. But Goldman wasn't buying that rally in biotech; rather the firm has another favorite part of the health-care market: "While near-term drug stocks may benefit from a relief rally, we still expect that drug pricing may remain a bipartisan issue and any changes to Obamacare may be drawn out. New regulations targeting drug pricing and the cost of the Affordable Care Act (ACA) legislation (a/k/a "Obamacare") will pressure revenues of Pharmaceutical and Biotech firms while increased utilization will continue to benefit medical equipment and services companies. Health care equipment & services is one of the few slices of the US market that has demonstrated a statistically significant relationship with changes in presidential election odds. The long health care equipment & services vs. short pharmaceuticals and biotech pair trade returned 300 bp in the last month as Democrat odds rose." Goldman recommended buying stocks with high overseas earnings on the hopes for a repatriation tax holiday from Trump and the Republican-controlled Congress. The president-elect has called for a one-time 10 percent tax on foreign profits . "Infrastructure spending is likely to be a key policy initiative of President-elect Trump. One source of funding for fiscal spending will likely be corporate tax reform on previously untaxed foreign profits," the note said. Goldman developed a special basket of stocks to benefit from such a holiday. Members of its "High Overseas Earnings Basket" include Priceline Group , Procter & Gamble , Exxon Mobil , Citigroup , Pfizer , General Electric , Microsoft , Apple and Intel .

Alain Jocard | AFP | Getty Images

The stock market will end 2016 about 2 percent lower from current levels in the wake of Donald Trump's surprise election, Goldman Sachs predicted in a note to clients Wednesday.

While the overall market will be stuck, Goldman said, bank stocks will outperform and biotech shares may disappoint.

"Following several years of gridlock inside the Beltway, the potential now exists for a number of legislative initiatives to be passed," U.S. equity strategist David Kostin wrote.

"Examples would include fiscal stimulus/infrastructure spending, corporate tax reform, reducing regulation and addressing rising health care costs. However, the prospect of new legislation also raises uncertainty about policy specifics and may prompt corporations to delay action until details are finalized."