From higher fiscal spending to rising inflation, Goldman Sachs' economic research team gave investors its favorite 2017 predictions for the markets and global economies Thursday. Many of the investment bank's projections were directly impacted by the surprising election of Donald Trump and his stated economic policies.
Goldman's Charles Himmelberg sent the report titled "Top Ten Market Themes for 2017: Higher growth, higher risk, slightly higher returns" to clients Thursday.
Goldman's 10 themes are:
Here's more detail on four of Goldman's 2017 themes.
Don't expect much, Goldman Sachs told clients.
"Comparing this year's forecasts to last year's reveals that, despite a slighter stronger outlook for global growth, expected returns remain low," Himmelberg wrote.
"Stronger cyclical growth in the US will probably not do much for asset markets except help shift the narrative from 'low-flation' and monetary accommodation to reflation and rising rates."
The firm's 2017 year-end forecast for the is 2,200, up just 1 percent from Wednesday's close. Asian equities ex-Japan represented the best opportunity with a potential return of roughly 12 percent, according to the strategist.
On the flip side, Goldman recommended investors stay away from German 10-year bonds, which the firm projected would fall more than 11 percent driven by currency depreciation. For U.S. Treasurys, the strategist expects a roughly flat total return with the 10-year Treasury yield ending 2017 at 2.75 percent.
"Markets are starved for growth. This is plainly visible in the eagerness with which markets seized on Trump's growth-focused message," he wrote.
"US fiscal stimulus is a welcome growth and reflationary impulse ... And Republican control of congress gives such an agenda a good chance of being enacted."
The strategist expects the Republican-led Congress will pass Trump's economic agenda of higher infrastructure and defense spending.
Trump's "protectionist trade policy tops the list of policy priorities on which economists and global markets have been most focused. We share these concerns but, relative to market views, we think the popular media narrative on the downside risk of a trade war is overstated," he said.
Himmelberg predicted the free-trader Republicans in the House and Senate will act as a counter-weight to any extreme trade protectionist legislation and Trump "will take a far more practical approach" to U.S. trade policy.
"'Reflation' is the theme du jour following Donald Trump's unexpected emphasis on infrastructure spending in his acceptance speech on election night," Himmelberg wrote.
"What seems clear to us, as argued above, is that economic issues, notably tax cuts, infrastructure spending and defense spending, are high on the agenda — a recipe for reflation."
He expects rising oil prices will also "push up headline CPI" inflation data in the global developed markets early next year. Central banks may let inflation run above their 2 percent target rates after struggling for years with low inflation numbers, according to the strategist.