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The S&P 500 can add to record highs through year-end with Trump headed to the White House, Goldman says.
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The end of political uncertainty will bring back investors and spark a post-election rally.
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M&A activity will likely pick up under Trump, presenting another bull case for stocks.
With the presidential election wrapped up, Goldman Sachs anticipates that the stock market will keep moving higher.
The S&P 500, Dow Jones industrial average, and Nasdaq 100 all hit all-time highs on Wednesday after Donald Trump’s presidential-election victory pleased investors anticipating his pro-business policies.
According to analysts led by chief US equity strategist David Kostin, there are three reasons why the momentum will keep up:
First, the drop in political uncertainty following a presidential race typically fuels robust year-end returns during election years.
Historically, the S&P has generated a median return of 4% between Election Day and the year’s calendar end, Goldman said. If the same happens this time, that would push the benchmark index up to around 6015, reflecting a forward price-to-earnings multiple of 22x.
“Along with the resolution of election uncertainty, resilient recent economic growth data and continued Fed rate cuts support the healthy near-term outlook for US stocks,” analysts wrote.
However, the bank warned that a steep increase in Treasury yields could muddy any post-election rally.
That could happen, as the 10-year rate has already climbed to more than 4.4% as anticipation of a Trump win mounted through October. Some consider this signal that bond traders are worried over the US fiscal trajectory under Trump, given that he has offered little policy solutions to the country’s growing debt pile.
On the other hand, Goldman notes that equities have dismissed the rise in yields as they have also climbed on signs of a stronger economy.
Second, the stock market should move higher as investors reallocate into equities.
According to Goldman, investors decreased equity exposure of the election, with hedge funds reducing both net and gross leverage across recent weeks. With uncertainty now headed lower, investors are likely to reposition into the market, boosting S&P appreciation, the bank said.
Finally, bolstered M&A and IPO activity under Trump’s administration will further support stock prices, Goldman speculates.
Regulation that has come to challenge mergers in recent years will likely be relaxed under the president-elect, boosting business confidence and corporate cash spending, the bank said. An estimated $4 trillion in spending next year would be split between paying shareholders and investing in growth.
