Credit Suisse sees another 7 percent more to go for US rally as Trump's policies unleash inflation

Published Fri, Dec 2 201611:04 AM EST

Credit Suisse's global equity strategy team led by Andrew Garthwaite sees the S & P 500 rising 7 percent to 2,350 by midyear 2017, up from a previous midyear forecast of 2,200, as the Donald Trump -led government takes over the task of stimulating the economy from the Federal Reserve and defensive-oriented investors race to catch up with the new paradigm. "The key positive for 2017, in our judgement, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policymakers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising," the report says. "Other supportive factors are: earnings revisions at a five-year high; a still reasonably elevated equity risk premium; excess liquidity; and rising economic momentum." But like Goldman Sachs , Credit Suisse sees a slight pullback in the second half of the year with the S & P 500 ending 2017 at 2,300. "The second-half challenges include the potential negative impact of U.S. bond yields above 3 percent (3 percent being the CS view for end-2017); the growing pricing power of U.S. labor squeezing profit margins; and the risk of China refocusing on reform rather than pro-growth policies," writes the Garthwaite-led team. Yet the team continues to prefer stocks in the U.S. and abroad over both bonds and gold. Here's why: "We also think central bankers will be prone to allow economies to run 'too hot' and rather risk inflation than deflation (as the Swedish Riksbank is doing, in our view). In essence, this indicates investors need to buy inflation hedges — equities — and not bonds, which are deflation hedges. We think market-implied inflation expectations are still too low and equities should benefit as these rise; in periods of rising inflation, the market has tended to re-rate to an average of 20x trailing earnings. Only when the inflation rate rises above 3 percent do equities tend to de-rate." Underpinning equity gains is Credit Suisse's prediction for global GDP growth of 3 percent-plus next year. "Looking at equities in aggregate, no improvement in macro momentum is being discounted," the report says. "In fact, the ratio of equity to bond returns suggests a modest fall in lead indicators while we believe global GDP will accelerate." To be sure, Credit Suisse says it is still a relative underweight the U.S. on a global scale because it favors Europe and Japan more. Like many on Wall Street, Credit Suisse believes that Trump will moderate some of his more extreme stances from the campaign and that will boost U.S. stocks. "Our judgement is that the rhetoric on protectionism and immigration will be toned down, while fiscal stimulus, corporate tax cuts, deregulation and repatriation of cash held overseas are all potentially growth and EPS positive," states the report. "Almost all of President-elect Trump's policies are inflationary and thus support a bond-to-equity switch."

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Credit Suisse's global equity strategy team led by Andrew Garthwaite sees the rising 7 percent to 2,350 by midyear 2017, up from a previous midyear forecast of 2,200, as the Donald Trump-led government takes over the task of stimulating the economy from the Federal Reserve and defensive-oriented investors race to catch up with the new paradigm.

"The key positive for 2017, in our judgement, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policymakers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising," the report says.

"Other supportive factors are: earnings revisions at a five-year high; a still reasonably elevated equity risk premium; excess liquidity; and rising economic momentum."

But like Goldman Sachs, Credit Suisse sees a slight pullback in the second half of the year with the S&P 500 ending 2017 at 2,300.