Citi raises its 2017 S&P 500 forecast, citing the 'Trump jump and pump'

Published Fri, Dec 23 201610:31 AM EST

Citi Research strategist Tobias Levkovich told investors Donald Trump's economic agenda will boost corporate earnings next year and result in higher stock prices. "The combination of planned tax cuts (both corporate and personal), light-handed regulation, a repatriation tax holiday on overseas cash and possible infrastructure spending has buoyed hopes for faster economic and earnings growth in 2H17 into 2018," Levkovich wrote in a note to clients Thursday titled "The Trump Jump and Pump." "Corporate profits look poised to increase in 2017 and 2018 due in part to easing bank lending standards, a rebound in small-business optimism, tax cuts and energy sector recovery." The strategist said if the corporate tax rate is lowered to 20 percent from the current effective rate of 27 percent, it would add $12 a year to S & P 500 earnings per share. As a result he raised his 2017 market earnings-per-share forecast to $131 from $129, representing 9 percent annual earnings growth from 2016. The forecast only incorporates a tax reduction benefit to 2017 fourth-quarter earnings due to legislative timing. "The possibility of retroactive tax cuts could force 2017 numbers higher too," he added. Due to the potential for strong earnings growth from Trump's polices, Levkovich raised his 2017 S & P 500 price target to 2,425 from 2,325, representing 7 percent upside from Thursday's close. However, the strategist noted there are risks to his bullish forecast. He cited how every 1 percent move higher in the trade-weighted dollar would lower S & P 500 annual earnings per share by 25 cents. In addition, every 1 percent increase in credit costs would hurt the market's EPS by 90 cents. "While modest appreciation in the U.S. dollar and more rate hikes seem well baked into the Street's thought processes, more powerful shifts may not be and could generate new market worry," Levkovich wrote. "We continue to favor banks, diversified financials, energy, media and tech hardware, while keeping underweights on much of consumer staples, telecom services and pharmaceuticals," he added. To take advantage of Levkovich's sector calls, investors could buy the Financial Select Sector SPDR Fund and the Energy Select Sector SPDR Fund ETFs.

President-elect Donald Trump addresses to his supporters at the USA Thank You Tour 2016 at the Wisconsin State Fair Exposition Center in West Allis, Wisconsin.

Bilgin S. Sasmaz | Anadolu Agency | Getty Images

Citi Research strategist Tobias Levkovich told investors Donald Trump's economic agenda will boost corporate earnings next year and result in higher stock prices.

"The combination of planned tax cuts (both corporate and personal), light-handed regulation, a repatriation tax holiday on overseas cash and possible infrastructure spending has buoyed hopes for faster economic and earnings growth in 2H17 into 2018," Levkovich wrote in a note to clients Thursday titled "The Trump Jump and Pump."

"Corporate profits look poised to increase in 2017 and 2018 due in part to easing bank lending standards, a rebound in small-business optimism, tax cuts and energy sector recovery."

The strategist said if the corporate tax rate is lowered to 20 percent from the current effective rate of 27 percent, it would add $12 a year to earnings per share. As a result he raised his 2017 market earnings-per-share forecast to $131 from $129, representing 9 percent annual earnings growth from 2016.

The forecast only incorporates a tax reduction benefit to 2017 fourth-quarter earnings due to legislative timing.

"The possibility of retroactive tax cuts could force 2017 numbers higher too," he added.

Due to the potential for strong earnings growth from Trump's polices, Levkovich raised his 2017 S&P 500 price target to 2,425 from 2,325, representing 7 percent upside from Thursday's close.