×

Goldman Sachs has a new 'Trump trade' that rides surging small-business confidence

  • Goldman Sachs equity strategist David Kostin suggests one of the best "Trump trades" has been in shares of large companies with exposure to small- and medium-sized businesses.
  • The S&P 500 has added 21 percent since the election, making the "Trump rally" the fourth-best 12-month gain following a presidential election since 1936, according to Kostin.
  • Much of the confidence felt by small firms has been credited to expectations of tax reform and deregulation, issues then-candidate Trump made central to his campaign.
Donald Trump
Getty Images
Donald Trump

Soaring small-business optimism is translating into big gains for larger, publicly traded companies as Main Street hopes for even more deregulation and hotly anticipated tax reform, Goldman Sachs said.

Shares of big companies that get their revenue from small businesses have rallied 38 percent since the election, while "the Russell 2000 small-cap index has matched the performance of large caps," wrote David Kostin, Goldman's chief equity strategist, in a note to clients. "Small business owners have been thrilled at the prospect of deregulation under the Trump administration."

Following the 2016 presidential election, the NFIB Small Business Optimism Index — a measure of optimism among small-business owners — jumped to its highest level in more than 12 years, according to the note.

The S&P 500 has gained 21 percent since last November's election, making the "Trump rally" the fourth-best 12-month gain following a presidential election since 1936, according to Kostin. And while equities overall have performed well, investors may want to take a second look at firms that sell to medium- and small-sized businesses as tax reform looks more and more likely.

Hoping to deliver on similar campaign promises, House Republicans unveiled their new plan to repair the tax code last Thursday. The GOP plan aims to cut the corporate tax rate to 20 percent and reduce the number of income tax brackets from seven to four in what many proponents have deemed a welcome "simplification." Tax reform would be President Donald Trump's first major legislative win if passed.

But small businesses have already seen some promising signs as the president shifts to end Obama-era regulations. Since taking office, Trump has either withdrawn or delayed more than 800 proposed regulations, with plans to cut back even more.

Commerce Secretary Wilbur Ross told CNBC on Monday that he believes a "good portion" of the recent economic swell is due to regulatory relief.

"Trump has canceled 860 rules and regulations that had been imposed by the Obama administration, and there's barely a single CEO that comes to my office who isn't thrilled with the regulatory relief," said Ross.

Ross noted that Trump had been able to accomplish more deregulation because he was able to exercise executive powers.

CNBC's Michael Bloom contributed to this report.