Trump Policies Could Boost S&P 500 Earnings By 11%

Buy domestic-focused US stocks with high tax rates and lower labor costs as a percentage of sales; that’s Goldman Sachs’ playbook for 2017 according to the firm’s 2017 US Equity Outlook research booklet which was published at the beginning of this week.

Goldman is looking to play the themes of a stronger dollar, wage growth, and tax reform next year as these themes, which have already started to unfold continue.

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On average S&P 500 constituents generate 73% of their sales within the United States. This leaves just under a third of the index exposed to a strong dollar, but more importantly, it means that over two-thirds of the index will be able to capitalize on robust US economic growth. According to Goldman’s calculations, for every 100 basis point increase in US GDP the S&P 500’s earnings per share increase by $5. A 100 bps increase in global GDP growth, excluding the US gives a $3 boost to S&P 500 earnings per share.

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Goldman: Trump Policies Could Boost S&P 500 Earnings By 11%

Goldman’s economists expect the US economy to grow at a rate of 2.1% in the base case next year. Off the back of this forecast, as well as other factors mentioned below, the bank expects S&P 500 earnings per share to grow to $123 on an adjusted basis and $116 on an operating basis up from $117 and $105 respectively last year. What is interesting to note about these figures is that Goldman expects the gap between adjusted and operating earnings to contract substantially next year. For 2016 the bank is estimating a gap of $12 between adjusted and operating earnings, down from $17 for 2015. As the difference between adjusted operating earnings is generally seen as a proxy for earnings quality, the contraction can be interpreted as the belief from the bank that S&P 500 earnings are generally improving quality.

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Goldman’s analysis concludes that S&P 500 adjusted earnings per share could come in at $123 next year, up 5% year-on-year in the base case. However, if Donald Trump starts to act on his campaign promises within the year Goldman estimates S&P 500 adjusted earnings could hit $130 in the best case of the back of a lower effective corporate tax rate, buybacks funded by repatriated cash, faster real GDP growth and higher interest rates. A lower effective corporate tax rate is expected to have the largest impact on S&P 500 earnings. A 50 bps improvement in S&P 500 and margins will increase adjusted earnings per share by $5.

Trump’s corporate tax reductions could boost net margins to add $6 in earnings per share is the index. On the other hand, the repatriation of cash and higher interest rates will drive a stronger dollar, which could detract $2 from adjusted S&P 500 earnings per share.

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