RBC sets uber-bullish 2,500 S&P 500 target for 2017, sees earnings reaccelerating under Trump

Published Mon, Dec 5 20161:24 PM EST

The recent stock market rally on hopes for pro-growth economic policies under President-elect Donald Trump is just a small hint of what lies ahead as the S & P 500 will rally 14 percent in 2017 from current levels, according to RBC Capital Markets, which on Monday released its investment playbook for next year. "While the market's recent rotation might seem abrupt, the S & P 500 is up only 3 percent since Election Day, leaving it with substantial potential upside," RBC's chief equity strategist, Jonathan Golub, wrote in a note to clients, setting a 2,500 year-end price target for the index. The bullishness stems from the economic policies likely implemented by Trump such as a reduction in corporate taxes to 15 percent from 35 percent, along with other fiscal measures, which in turn could flood S & P companies with cash, and spark a wave of buybacks, mergers and acquisitions, and earnings growth, according to the firm. "Following two years of near-zero growth, we expect profits to reaccelerate," said Golub, who predicts earnings in 2017 could jump by 7.6 percent, while that figure could increase to 9.4 percent by 2018, a notion the market may be underplaying. "This place holder for changes in taxes, regulation and spending is quite modest, in our view, as an adjustment to corporate taxes alone could easily double this impact," he said. Golub calls this trend the "biggest paradigm shift since Reagan" and expects both earnings and multiples to expand next year; although he thinks multiples will advance more quickly than earnings as analysts wait for clarity on Trump's policies before adjusting estimates. Among the biggest beneficiaries, the strategist points to financials, as lower regulation and a higher interest rate environment facilitates business conditions. Small-cap companies could also emerge as winners given their reliance on domestic revenue. "Small caps and financials are leading the broader market, up 10.6 percent and 12.3 percent, respectively, since the election. The market has been quick to reward low-P/E stocks and those with higher price volatility, as well as names with higher effective tax rates and more domestic business models," said Golub. RBC's favorite Trump plays include banks such as U.S. Bancorp and PNC Bank , along with consumer discretionary shares of Macy's and CarMax . Airline stocks such as Alaska Air and Southwest Airlines and drugmaker AmerisourceBergen also look attractive, Golub said. Below are some of the companies in RBC's Trump Portfolio, which is composed of names with heavy domestic operations that trade at decent valuations and could benefit the most from lower taxes.

Michael Nagle | Bloomberg | Getty Images

The recent stock market rally on hopes for pro-growth economic policies under President-elect Donald Trump is just a small hint of what lies ahead as the will rally 14 percent in 2017 from current levels, according to RBC Capital Markets, which on Monday released its investment playbook for next year.

"While the market's recent rotation might seem abrupt, the S&P 500 is up only 3 percent since Election Day, leaving it with substantial potential upside," RBC's chief equity strategist, Jonathan Golub, wrote in a note to clients, setting a 2,500 year-end price target for the index.

The bullishness stems from the economic policies likely implemented by Trump such as a reduction in corporate taxes to 15 percent from 35 percent, along with other fiscal measures, which in turn could flood S&P companies with cash, and spark a wave of buybacks, mergers and acquisitions, and earnings growth, according to the firm.