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Here's what investors should watch for in Trump's State of the Union

Key Points
  • Investors should be looking for clues about U.S.-China trade talks, drug pricing and possible infrastructure spending measures.
  • These are issues in which President Trump could gain bipartisan support, according to Fundstrat Washington policy strategist Tom Block. It would be bullish for stocks if Trump strikes a bipartisan tone.
  • But "while the White House has leaked the story line of the President wanting to give a speech that unifies, that seems out of character with recent comments by the President," Block writes.
President Donald Trump delivers his State of the Union address to a joint session of the U.S. Congress on Capitol Hill in Washington, U.S. January 30, 2018.
Leah Millis | Reuters

Investors should gear up for what could be a market-moving State of the Union address with the president making comments on U.S.-China trade talks, drug pricing and infrastructure, among other matters, according to Wall Street policy strategists.

The speech, which will be given by President Donald Trump at 9 p.m. ET Tuesday, comes a little more than a week after the end of the longest U.S. government shutdown. The government remained shut down for 35 days as Trump and congressional leaders could not agree on funding for a wall along the U.S.-Mexico border.

The administration has suggested Trump will stress unity and bipartisanship in his address. However, Congress and the administration have not been able to come to an agreement on immigration policy or the border wall. In fact, Trump said last week he might have to declare a national emergency to build the border wall. Given all of this, investors will take their cues from the tone of the speech as well as which policy and political announcements the president could make.

"There are issues: infrastructure, drug pricing, and trade where he could build bipartisan support," Tom Block, Washington policy strategist at Fundstrat Global Advisors, wrote in a note Monday. But "while the White House has leaked the story line of the President wanting to give a speech that unifies, that seems out of character with recent comments by the President."

Trade

One of the most pressing issues for investors heading into the State of the Union is U.S.-China trade.

Relations between the two countries appeared to have thawed recently. Last week, Trump said Chinese President Xi Jinping wrote in a letter that he hopes both sides will meet each other halfway on trade. Strategists believe Trump could a U.S.-China summit meeting.

China and the U.S. have been engaged in a trade war since last year. Both countries have slapped tariffs on billions of dollars worth of their goods. These tariffs have sent ripples through financial markets as investors assess their impact on corporate profits. The two countries also set a March 2 deadline to strike a permanent trade deal. Otherwise, additional U.S. levies on Chinese goods could take effect.

"Trade talks between the U.S. and China are trending positive but a deal will take further negotiations and a face-to-face meeting between Trump and Xi," Raymond James public policy analyst Ed Mills said in a note to clients. "We believe that the market has been anticipating a 'mini deal' where existing tariffs remain, China purchases more U.S. product, and an extension is given on enforcement of IP/industrial policy reforms. We will gauge market reaction against this expectation."

If the March deadline is extended, current tariffs stay in place and additional ones do not take effect, shares of companies like Qorvo, Qualcomm and Wynn Resorts could outperform, according to Strategas Research Partners. These companies have high revenue exposure to China, thus stand to benefit the most from U.S.-China trade tensions dissipating.

"There is speculation he may announce a date for a meeting with Chinese President Xi, and he may also push Congress to approve the new, revised NAFTA known as USMCA," Fundstrat's Block added.

Any announcement made on the trade front could also coincide with one regarding a meeting with North Korean leader Kim Jong Un. This could boost stocks at the expense of gold prices if such a meeting decreases geopolitical tensions.

Drug pricing

Wall Street is also looking for clues on how the administration plans to curb drug prices.

On Thursday, the administration unveiled a proposal that would ban so-called backdoor deals cut by pharmaceutical companies with middlemen who get preferred status for their drugs through Medicare.

Drugmakers currently pay rebates to pharmacy benefit management companies like CVS Health and UnitedHealthGroup to include their medications on Medicare Part D plans. This proposal would pass an estimated $29 billion in rebates from drug companies to consumers. PBMs would get a flat fee for including drugs on their plans instead.

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Shares of CVS Health, UnitedHealth and Cigna all fell on the news last week.

"If implemented in its current form, the proposed rule could have sweeping changes to the drug channel," said Mills. "This is only a proposed regulation and still must go through a comment period before finalization. If all goes according to the HHS schedule, the new regulation will be fully implemented by January 1, 2020."

Infrastructure

Trump's comments on infrastructure spending will also be a key for investors.

CNBC learned in January that the White House held a high-level meeting to plot a possible path forward for a "significant" infrastructure initiative. However, it is not clear whether the administration will move forward with its own plan or work with Democrats. Trump said after the November midterms that he hoped to work with Democrats on infrastructure, adding: "We have a lot of things in common on infrastructure."

Dan Clifton, head of policy research at Strategas, said Trump will likely push for an infrastructure bill in the speech. He added, however, that the two sides are unlikely to come to agreement on a big infrastructure measure. Nonetheless, some stocks could move on the Trump comments.

Stocks that could benefit from such measures include Vulcan Materials, Jacobs Engineering and Fluor Corp.

"Rather, we would anticipate a small amount of infrastructure funding to be included as part of the sequestration spending deal," Clifton said in a note. "We expect this to be $20-$30bn for a couple of years, thereby making the number look small. This funding level will move the needle on stocks levered to federal infrastructure spending, but it will not be a macro event."

Wall stalemate could throw water on potentially bullish speech

While Trump could strike a bipartisan tone on trade, drug pricing and infrastructure — which would be bullish for the broader stock market — his message could be undercut by the stalemate between the administration and Democrats over funding for the U.S.-Mexico border wall.

Isaac Boltansky, director of policy research at Compass Point, said Trump will likely dedicate a good chunk of his speech to his wall proposal. "We believe there will be an outsized focus on the border wall and the president could use this forum to build his case for unilateral administrative action on the wall (e.g., national emergency declaration)," Boltansky wrote in a note.

With reporting by CNBC's Michael Bloom

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