Trump policies to boost S&P 500 by 15% to 2,500 in 2018, Deutsche Bank says

Published Mon, Nov 21 201611:59 AM EST

Deutsche Bank strategist David Bianco told investors the market will rally over the next two years on optimism about President-elect Donald Trump's economic agenda. "We think the market is under appreciating the likely big boost to S & P EPS from a lower corporate tax rate and the boost to bank profits from rising yields (and lower pension expense) and the much higher chance now of a long-lasting economic expansion that rivals the 10-year U.S. record," Bianco wrote in a note to clients Friday. "We're more confident now that the S & P will reach 2,500 in 2018 before suffering its next bear market." He reiterated his 2016 year-end target for the S & P 500 of 2,200 and his 2017 year-end target of 2,350. He also expects the index will reach 2,250 by Inauguration Day, representing 3 percent upside from Friday's close. Bianco cited how every 5 percentage point reduction in the corporate tax rate will boost S & P 500 earnings per share by $5. He expects the current 35 percent corporate tax rate will be cut to about 25 percent. As a result he raised his 2017 S & P 500 earnings-per-share estimate to $130. "We stress our over-weights on big banks and health care and see upside at tech, [consumer discretionary] and utilities, but find valuations too demanding at energy, most industrials & materials. Staples have FX risk," he wrote. Bianco recommended utilities stocks for those looking for a "reliable real yield asset" to take the place of bonds. The sector will benefit from Trump's corporate tax cuts as nearly 100 percent of its profits are domestic and there is no currency risk, the strategist said. In addition, utilities are likely to get some of the infrastructure spending promised by Trump's camp, according to Bianco. And as a bond proxy, the sector won't lose its income-oriented demand from retirees and pensions, he added. For investors who want to take advantage of the firm's recommendation to add more utilities equity exposure, the Utilities Select Sector SPDR Fund tracks the performance of the S & P Utilities Select Sector Index.

Donald Trump

Jabin Botsford | The Washington Post | Getty Images

Deutsche Bank strategist David Bianco told investors the market will rally over the next two years on optimism about President-elect Donald Trump's economic agenda.

"We think the market is under appreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to bank profits from rising yields (and lower pension expense) and the much higher chance now of a long-lasting economic expansion that rivals the 10-year U.S. record," Bianco wrote in a note to clients Friday.

"We're more confident now that the S&P will reach 2,500 in 2018 before suffering its next bear market."