-
The S&P 500 could reach record highs through the end of the year if Trump takes office, Goldman says.
-
The end of political uncertainty will bring investors back and spark a post-election rally.
-
M&A activity is likely to pick up under Trump, providing another bull case for equities.
Now that the presidential elections are behind us, Goldman Sachs expects the stock market to rise further.
The S&P 500, the Dow Jones Industrial Average and the Nasdaq 100 all hit record highs on Wednesday after Donald Trump’s victory in the presidential election, pleasing investors who anticipated his pro-business policies.
According to analysts led by US equity strategist David Kostin, there are three reasons why the momentum continues:
First, the decline in political uncertainty after a presidential race typically produces robust year-end returns during election years.
Historically, the S&P has returned an average of 4% between Election Day and the end of the calendar, according to Goldman. If the same thing happens this time, it would push the benchmark index to around 6015, which reflects a price-to-earnings ratio of 22x.
“Along with the dissipation of election uncertainty, resilient recent economic growth data and continued Fed rate cuts support the healthy short-term outlook for U.S. equities,” analysts wrote.
However, the bank warned that a sharp rise in government bond yields could cloud any post-election rally.
That could happen, as 10-year yields have already risen to more than 4.4% amid mounting expectations for a Trump victory in October. Some see this as a signal that bond traders are concerned about the U.S. fiscal path under Trump, as he has offered few policy solutions to the country’s growing debt pile.
On the other hand, Goldman notes that stocks have rejected the rise in yields as they have also risen on signs of a stronger economy.
Second, the stock market should rise higher as investors reallocate their shares.
According to Goldman, investors have reduced equity exposure during the election, with hedge funds cutting both net and gross debt in recent weeks. As uncertainty diminishes, investors are likely to reposition themselves in the market, boosting S&P’s valuation, the bank said.
Finally, The strengthened M&A and IPO activity under the Trump administration will further support stock pricesspeculates Goldman.
Regulations that have hindered mergers in recent years are likely to be relaxed under the new president, boosting business confidence and companies’ cash outlays, the bank said. Next year, an estimated $4 trillion in spending would be split between paying shareholders and investing in growth.
