US Economy

Corporate profits won't grow in Trump era without greater productivity: Strategist

All signs point to US consumer 'cruising along': Pro

Though economic outlook has improved among consumers, sluggish productivity growth still poses a threat to company profits in the new year, strategist Jason Trennert told CNBC on Tuesday.

Trennert, chief investment strategist at Strategas Research Partners, said that while a change in attitude could boost growth, companies under a pro-business administration will have to shift their methods to enjoy that expansion.

"I think the big question for business really is whether businesses change from focusing more on financial engineering to actually true capital spending," Trennert told "Squawk Box."

"Because I think one of the things that's been absent over the last couple of years has been productivity, and it will be very difficult to get a continuation of corporate profits without an increase in productivity."

But productivity growth is difficult to spur, especially when industries see success despite lower productivity numbers, said Steven Ricchiuto, Mizuho Securities' chief U.S. economist.

"The problem we have right now is the sector of the economy that's growing the strongest is health care, which has the absolute lowest productivity in the entire economy," Ricchiuto told CNBC.

The solution, however, could be twofold.

"The big thing we have to do is we have to [transition] away from a service economy to more of a manufacturing economy where all of the productivity is," Ricchiuto said.

UBS' deputy chief U.S. economist Drew Matus is more confident in the service sector's ability to spur productivity growth on its own.

"I think in the future you could see more productivity from the service sector," Matus told "Squawk Box." "Look at the financial services industry. People are constantly being replaced now, technology's picking up, and that's an unusual change."

Matus said businesses in the service sector are beginning to feel some "pressure" from expectations for productivity growth.

Trennert said that that pressure, combined with higher expectations for interest rate hikes in 2017, could serve as fuel for productivity growth so long as the dollar's strength doesn't run too hot.

Strong sentiment driving markets higher: Pro

But Keith Banks of Bank of America Private Wealth Management said the market will run hotter regardless of the productivity lag.

"We look at a couple things," he said. "Number one, we think you're going to see this year higher nominal growth, number two, you're going to see higher corporate profits, and a key component … is sentiment."

"We think business, consumer, and investor sentiment are all going to stay strong, and all that's going to help drive the market higher," Banks told "Squawk Box."

And as the market rally continues ahead of Trump's inauguration, Banks pointed to where investors are shifting their portfolios.

"When Trump was elected, people were not positioned for the kind of things that we believe are going to come [like] fiscal stimulus and other pro-growth policies," Banks said.

Investors found themselves overweight, or over-invested, in more defensive areas like long-duration fixed income — the price of which falls when interest rates rise — and bonds, he said.

"What we would say is you need to continue to move toward a more cyclical exposure. Value over growth," Banks advised. "You need to continue to reduce exposure to long duration fixed income."

"Any stock, any sector that would fit in that scheme we think is still a good play as we enter '17 and probably for most of '17," he added.