Goldman to surge 20% on the rising economic growth under Trump, Deutsche Bank says. Upgrades to buy

Published Wed, Nov 30 20169:02 AM ESTUpdated Wed, Nov 30 201610:20 AM EST

The rally in bank stocks has priced in higher interest rates, but there is much more upside in the sector's shares from the economic growth that will come from the Trump administration's plans for deregulation and lower taxes, according to Deutsche Bank. Goldman Sachs will be one of the particular beneficiaries of the second part of this rally, Deutsche said, upgrading the share to buy from hold. "GS seems well positioned for a stronger macro environment given revenue upside, good cost control and a valuation below peers (despite similar/higher current and expected returns)," wrote analyst Matt O'Connor in a note Tuesday. "A stronger economy should benefit many capital market businesses—incl advisory, equity capital markets, and both fixed and equity trading (all areas of strength at GS). This should also be a positive backdrop for investing and lending (even assuming no regulatory changes)." Here's where O'Connor sees Goldman shares going... The analyst raised his 12-month price target to $255 a share from $180. The new forecast represents a 20 percent increase from Goldman's Tuesday's close. "GS shares have mostly kept pace in the post election rally, but this was after lagging peers since the February lows (GS shares are up 50% since the 2/11 bottom vs. a ~60% rise for Market Sensitives on average)," stated the note. Goldman is up almost 17 percent since the election and the Financial Select SPDR ETF is up more than 11 percent. "We sense that leverage to higher rates is mostly reflected in stock prices, but that higher lending and fee volumes from a stronger economy may not be," stated O'Connor. The analyst said he believes there is a total of 25 to 30 percent earnings upside for the banking sector based on "a combination of stronger economic growth (better loan growth and fee revenues), higher interest rates (driving higher net interest margins), less regulation and lower tax rates." JPMorgan is another favorite play of O'Connor's, who raised the bank's 12-month target to $90 from $73. The new forecast represents 14 percent upside from Tuesday's close. On Goldman, the analyst sees the bank earning $23.12 a share in 2018, a 50 percent increase from Deutsche's 2016 estimate.

Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc.

Michael Nagle | Bloomberg | Getty Images

"GS seems well positioned for a stronger macro environment given revenue upside, good cost control and a valuation below peers (despite similar/higher current and expected returns)," wrote analyst Matt O'Connor in a note Tuesday.

"A stronger economy should benefit many capital market businesses—incl advisory, equity capital markets, and both fixed and equity trading (all areas of strength at GS). This should also be a positive backdrop for investing and lending (even assuming no regulatory changes)."

Here's where O'Connor sees Goldman shares going...