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Citi Research strategist Tobias Levkovich told investors Donald Trump's and the Republican Congress' economic agenda may substantially boosts corporate earnings and economic growth if enacted.
"A meaningful fiscal push in addition to improved lending standards might lead to accelerated growth," Levkovich wrote in a note to clients Tuesday titled "Trumped Up Could Trickle Down."
"Tax cuts could be quite stimulative to S&P 500 EPS," he wrote.
The strategist explained if the corporate tax rate is reduced to 20 percent from the current effective rate of 27 percent, it would add $12 to his 2017 S&P 500 earnings-per-share estimate of $129, an increase of 9.3 percent. He also noted that Trump's proposed $1 trillion of fiscal stimulus would be a "significant number" for the $16 trillion U.S. economy.
"We suspect that investors may not be willing to accord the same P/E for earnings generated by a lower tax rate versus one for underlying operating performance. Nonetheless, even if we assumed half the market multiple on the incremental tax-related EPS gains, it will still be additive to the S&P 500's upside potential," he wrote. "We would like to see more data and details before changing our forecasts."
Levkovich was more definitive on the potential passage of an overseas earnings repatriation bill. He expects the repatriation size will be larger than the $600 billion companies brought home during the last one-time tax break in 2004.
"The likelihood of a repatriation of trapped overseas funds seems high with the GOP controlling the White House and Congress. There is the hope that the money would be used for capex especially with large one-time write-offs being proposed," he wrote.
However, it's not all good news as stronger economic growth may cause inflation and a rising dollar, according to the strategist. Levkovich estimated every 10 percent move higher by the dollar would detract 2 percent of annual earnings from the S&P 500 as the value of foreign earnings falls.
"A stronger US dollar is plausible if growth and inflation ensue, thereby limiting the earnings benefits. Higher rates from the Fed and possible 'crowding out' plus inflation pushing bond yields upward are viewed as offsetting negatives especially if the dollar climbs and eats into earnings," he wrote.
For those concerned over a strengthening dollar, Citi Research recommended clients avoid S&P 500 companies with large international exposure such as the seven stocks below: