As 2016 comes to a close with US risk on a veritable tear thanks to (possibly misplaced) optimism surrounding the prospects for fiscal stimulus under the new commander (and Tweeter) in chief and rates on a similar tear as US 10Y yields drag their counterparts higher, I thought it was worth publishing the following chart from Deutsche Bank which depicts total returns for different asset classes in 2016.
Below that, find Deutsche’s outlook for US equities in the coming year. Note the EPS boost assumed under Trump’s tax cuts and the prediction that the S&P can hit 2,500 in 2018 before we get a correction.
Sir John Templeton once famously said’ “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We have seen a microcosm of at least the first three facets of that thesis since the Presidential elections. The question we face now is: have we already hit the “euphoria” phase? Transports are up 15% since the election and Financials are up over 20%. From the perspectives of David Bianco and Binky Chadha, we still have some room to go higher. Chadha appeals to the fact that equities flows had been so poor for so long, that we will continue to enjoy an underlying bid to the market that will be further buttressed by the ongoing buyback support. Bianco feels that while much has already been priced in, the potential benefits of a simple and achievable cut to the nominal corporate tax rate from 35% to 25% would drive an additional $10 of EPS to his current $130 S&P forecast.