Donald Trump’s presidency may unleash the same kind of investor enthusiasm that drove stocks to record levels during the boom times of President Ronald Reagan, according to strategists at Barclays Capital.
The S&P 500 stock index has risen about 10 percent since Trump was elected president on a platform of cutting taxes and regulation, but that doesn’t mean investors are showing “excessive optimism,” the bank said in a Feb. 16 report obtained by Newsmax Finance.
“After the Reagan tax cut of 1986, the S&P 500 rallied 40 percent in nine months,” according to Keith Parker, head U.S. equity strategist at Barclays.
Stocks also rebounded from the crash of Oct. 19, 1987, when the Dow Jones Industrial Average fell 22.6 percent on “Black Monday” for the worst one-day decline in history.
“Though the period was marred by the crash, S&P EPS did rise over 50 percent in 1988 after the plan was implemented,” Barclays said.
The bank’s analysis of 10 drivers of stock values, including taxes, earnings growth, dividend payouts and volatility, shows that equities aren’t too expensive compared with historical averages. The Barclays model shows the S&P 500 is valued at about 19.6 times earnings, which is in line with the trailing 12-month mean of 19.4 times.
Corporate tax cuts will help to drive stock values, Barclays said, although profits would suffer from a “border adjustment tax” on imported goods. Congressional Republicans have included the levy among proposed changes to the tax code.
“With potential EPS upside of 12 percent from a tax rate of 20 percent, the P/E would get a short-term boost, and our model suggests that the market would quickly price 85 percent-90 percent of the benefit,” Barclays said. “The negative effects of a border tax, if one is included, would likely see markets consolidate as EPS would not get much of a boost from the plan.”
Trump on Thursday sent a message by Twitter saying stocks will keep rising from this week's record levels.
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