Some are questioning whether the Trump rally has gone its course and whether company valuations can be sustained, but RBC Capital Markets Chief Equity Strategist Jonathan Golub is keeping the faith.
“[W]e believe that we are in the early days of this rotation,” Golub said in a note to clients, as quoted by the Financial Post
. “The Trump Rally will continue as long as (1) the economy continues to reflate, and (2) the market views higher inflation expectations and rates positively.”
He also asserted that company multiples are not overextended. It’s just that many analyst estimates are “stale,” he said, arguing that investors react more quickly to incomplete information than analysts, who move cautiously in adjusting estimates after breaking news. “This dynamic is playing out post-election, with stocks sharply higher while estimates remain largely unchanged,” he said. “This timing difference creates the false impression that valuations are stretched, and should correct as analysts catch up to the market.”
After Trump’s election win, the S&P 500 has advanced by more than 4%, reaching 2,256.96 at Monday’s market close. Earlier this month, RBC set a 2017 year-end projection of 2,500 for the S&P 500. Other institutions have been more conservative, with forecasts of 2,325 from Citi and 2,400 from JPMorgan.
According to Golub, the current Trump rally “largely resembles a classic pro-cyclical, early-stage, reflationary market, characterized by the outperformance of Financials, deep cyclicals, and small caps.”
“We believe that the pro-cyclical tone of the market and its trajectory forward will continue to work in tandem throughout 2017,” he said.
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