Goldman: Trump's tax policy may drive S&P 500 EPS growth by ~20% in the next two years

Goldman published a research note saying that the tax-cut policy proposed by Donald Trump, who was elected as the president of the United States, could boost the earnings of the S&P 500 index by more than 20 per cent.The investment bank’s strategists expect the S&P 500 index’s earnings per share to grow by about 20 per cent over the next two years. Goldman forecasts the S&P 500 index’s earnings per share to be US$241 for the full year of 2024, up 11 per cent in 2025 and 7 per cent in 2026 to US$288.But the investment bank said in a report last Friday that those targets could be surpassed if Mr Trump cuts corporate taxes, adding that the latest election results increased its forecast’s upside potential.“Tax reform brings upside risk. The elected president has campaigned to cut the statutory corporate tax rate from the current 21 per cent to 15 per cent. We estimate that, all else equal, a one percentage point reduction in the statutory corporate tax rate would boost S&P 500 earnings per share by slightly less than 1 per cent. Additional benefits could also come from financial deregulation.”Last Wednesday, US stock markets surged after Mr Trump won the election. Bank of America said traders pumped $20bn into US stocks, the biggest one-day buying spree in five months, and $2.9bn flowed into financial funds each week, a record high.However, Goldman said Mr Trump’s plan to impose high tariffs on imports posed a risk to corporate profits. Its strategists estimated that a 5 percentage point increase in the effective US tariff rate could reduce the S&P 500 index’s earnings per share by up to 2 per cent.The bank expects the probability of Mr Trump imposing a 10-20 per cent tariff on all US imports to be 40 per cent.“During the trade conflict of 2018-2019, companies were generally able to pass on tariff costs to customers,” the bank’s strategists said. “However, even if this were to happen again, tariffs could reduce earnings through weaker consumer spending, retaliatory tariffs on US exports and increased uncertainty.”Economists have described Mr Trump’s economic plan as inflationary and say his policies, including his tariff plans, could push up interest rates.Goldman expects the S&P 500 index to experience a decade of lacklustre returns in the long run. Its strategists said in a report last month that part of the reason was the expected rise in interest rates and overvaluation and concentration in the market.