Barclays: Increase exposure to US stocks on Trump; tax cuts to raise earnings by 10%

Scott Eells | Bloomberg | Getty Images

Barclays on Thursday advised clients to sell bonds and increase their exposure to U.S. equities as lower taxes from the incoming Donald Trump administration will lead to higher earnings, propelling the stock market to new highs next year.

"Going into 2017, equities should be supported by an upturn in EPS [earning per share] and still attractive valuations versus bonds, though volatility is likely to remain elevated. The rise in rates should accelerate the bond-equity rotation and implied equity allocations are still 3-4 [percentage points] below 2015 levels," strategist Keith Parker wrote in a note to clients. "A 15% corporate tax rate could boost S&P 500 EPS by up to 10%."

Parker said bond inflows in 2016 reached $270 billion, while equity outflows were $225 billion as investors adopted a "risk off" strategy. But given the potential for a bottom in yields, those funds are likely to be redirected to one place: equities.

"We believed that a bottoming in rates would see fund flows return to equity funds as the momentum trade in rates fades. With the worst bond selloff in over four decades after the US election, we think the rotation back to equities is likely to accelerate at the end of this year and the beginning of next year," he wrote.