Why Goldman Sachs Thinks Market May Rally despite Protectionism
Goldman Sachs on protectionism
In the previous part of this series, we saw that Goldman Sachs’s David Kostin is optimistic on the US equity market and his firm is confident that the S&P 500 Index could see 14% earnings growth.
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On one hand, Kostin discussed President Trump’s protectionism approach and the rising interest rate. On the other hand, he discussed tax cuts and deregulation. He said that capital expenditure will rise due to tax reform, and lead to capacity expansion and increased employment, both of which would benefit the economy.
He also said that although protectionism is on the rise and trade war talk is going on, some specific industries like the industrial and consumer discretionary companies will face rising input costs. The rising rates could affect the performance of utilities stocks. Most companies in the S&P 500 Index earn at least 70% of revenues from the United States, so Kostin thinks companies shouldn’t worry about this protectionism approach.
Tax reform could boost companies’ margin position. Rising margins could help companies increase capital expenditure. Rising capital expenditure will add more value to the industrial sector and deregulation will add more value to the financial sector. Thus, the market rally may continue in 2018.
Performance of ETFs in 2017
The SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500 Index, the Industrial Select Sector SPDR ETF (XLI), which tracks the performance of the industrial sector, and the Financial Select Sector SPDR ETF (XLF), which tracks the performance of the financial sector, have risen 19.6%, 23%, and 20%, respectively, in 2017.
In the next part of this series, we’ll analyze Goldman Sachs’s view on non-farm payrolls.