According to Saut, after a period of consolidation in the S&P 500 index, which ended in the middle of last year, a new secular bull run is gathering steam though he does expect a short-term pullback after last year’s rally.
Using a baseball analogy, Saut said: “If we’re in a nine-inning game, I’d say we’re somewhere between the 3rd and 4th innings.”
Market drivers shifting
Saut believes strongly in the view that US equity markets are transitioning from a bull market driven by lower interest rates and quantitative easing to an earnings driven one, thanks in part to the new president’s promised economic policies, especially his goal to lower corporate taxes.
He noted that the official Standard and Poor’s earnings per share (eps) estimate for the S&P 500 this year is about $131, meaning the index is currently trading at about 17 times earnings. He pointed out that every 1% drop in the corporate tax rate would theoretically add $1.31 to the earnings of S&P 500 stocks.
“If Trump gets a 15% corporate rate that adds $26.20 to the $131. I think he’s going get to get around 20%, but say he only 25% rate, that adds another $13.10 cents to the $131 so it gives $144 in earnings in 2017.
“And if you hold the p/e ratio constant at 17 times, that gives you a 2,450 price target on the S&P 500.”
Saut’s calculations point to a potential 10% percent rally in the S&P for 2017 from its current levels. “Which just happens to be the average S&P 500 annual return since 1926,” he noted.
Earnings strength
Looking at recently reported corporate earnings results, the performance is already better than expected.
According to Thomson Reuters data for the first week of January, of the 21 companies in the S&P 500 that have reported earnings to date for Q4 2016, 71% have reported earnings above analyst expectations. This is above the long-term average of 64% and in-line with the average over the past four quarters of 71%.
“I think profits troughed in the second quarter of last year and the comparisons over the next four quarters are going to look great. So we’re moving from an interest rate driven bull market to an earnings driven secular bull market,” he said.
In addition to a corporate tax boost to earnings, Saut said he also expects Trump to give businesses a 100% write off on capital expenditure, encourage the repatriation of corporate profits from overseas, which will further accelerate earnings, and lift the onerous regulatory environment.
Although Saut said he does not believe the much talked about infrastructure spending will take place, in the short term at least.
European advantage
For European investors, Saut argues they can also factor in a stronger dollar.
“For a European investor, you get a double bang of US equities going up in value and a rising currency,” he said, adding that currently many investors in Europe are underweight in their exposure to US stocks.
