The so-called "Trump trade" is just getting started, according to RBC Dominion Securities' chief market strategist.
The postelection rally in U.S. equities reflects a shift in growth and inflation expectations that is poised to continue through next year, Jonathan Golub said in a new report.
As a result of this "new investment regime," Mr. Golub foresees a strong year ahead in U.S. stocks, and has set a bullish year-end target of 2,500 for the S&P 500 index. That would represent a gain of 14 per cent from current prices.
"Interest rates and inflation expectations have jumped over the past five months on the back of a tight labour market and the promise of Trump's pro-growth policies," Mr. Golub wrote. "While the market's recent rotation might seem abrupt, the S&P 500 is up only 3 per cent since election day, leaving it with substantial potential upside."
Donald Trump's election win in November brought about a market reaction that few saw coming.
Rather than the sell-off widely expected under a Trump upset scenario, U.S. stocks have rallied on an index basis. At the sector level, there have been even more dramatic shifts.
Investors focusing on the potential economic benefits from the president-elect's policies have rushed toward cyclical stocks and smaller companies more leveraged to the domestic economy, at the expense of defensive stocks and bond proxies.
That rotation is "in the early innings," Mr. Golub said.
And an improving environment for sectors like financials and energy should boost the pace of the earnings recovery.
Having emerged from a prolonged profits recession, companies in the S&P 500 are expected to generate earnings growth of 7.6 per cent next year and 9.4 per cent in 2018, the report said. Those forecasts include a positive impact from Trump policies of 2 to 3 per cent.
"This [2- to 3-per-cent forecast based on] changes in taxes, regulation, and spending is quite modest, in our view, as an adjustment to corporate taxes alone could easily double this impact," Mr. Golub said.