The pro-growth proclivities of the Trump administration and continued accommodative monetary policy will propel the S&P 500 index to fresh records in 2017, according to JPMorgan Chase & Co. strategists including Dubravko Lakos-Bujas and Marko "Gandalf" Kolanovic.
"Equity upside will be closely linked to improving earnings delivery," they write. "Prospects of expansionary fiscal policies under a relatively easy monetary backdrop are likely to help support further re-rating of the equity multiple."
JPMorgan is calling for the S&P 500 index to end next year at 2,400, which represents upside of 9 per cent. That matches Societe General SA's forecast for next year as the highest on the Street.
The team's forecast for profit growth, however, does not incorporate potential changes to fiscal policy. If instituted, corporate tax reform and increased infrastructure spending would constitute upside risks to its estimate for earnings per share of $128 by improving revenue growth and margins.
Mr. Lakos-Bujas and Mr. Kolanovic anticipate that buybacks will materially buoy earnings per share for S&P 500 companies, hitting a record $500-billion in 2017.
While conventional wisdom held that the victory of President-elect Donald Trump would be a negative markets, strategists have warmed to the imminent regime change as risk assets performed well since Nov. 8.
Value stocks should continue to perform well in this environment, according to the JPMorgan's strategists, while the factors of low vol and quality lag.
"We maintain our sector views and recommend investors remain overweight sectors that would benefit from reflation and declining regulatory headwinds (Healthcare, Financials, Energy, and Materials) and underweight low volatility and defensive sectors (Staples and REITs)," they explain. "However, in the short-term we are turning less constructive on Financials given their strong recent relative outperformance and significant increase in rate expectations with Fed Funds futures curve fully pricing in FOMC dots through end of 2017."
The team sees elevated geopolitical risk in the cards for 2017, but the main sources of worry for risk assets are linked to two trends that have already been realized, to a certain extent: a stronger U.S. dollar and higher U.S. Treasury yields.
These dynamics "can destabilize equity price-to-earnings ratios, Emerging Markets, the housing market, and U.S. equity segments such as multinationals, domestic manufacturing, bond proxies, et cetera," they wrote.
A strong dollar and loftier bond yields "will also undercut the ability of the new US administration to revive US manufacturing or use the fiscal deficit to re-ignite growth," they warned.
Separately, HSBC Bank Plc Global Head of Fixed Income Strategy Steven Major agreed that "U.S. debt levels are so high that increased yields could push the costs of servicing debt to unsustainable levels."