Shareholders seem even more convinced of the potential gains than the perennially hopeful Wall Street analysts. Not only have earnings projections gone up since the election, there's also been a big jump in the valuation of every dollar of future earnings. The 12-month forward price/earnings ratio--using Thomson Reuters IBES operating earnings--is up to 17.2 from 16.2. That's the highest since the optimism of spring 2015, when forward PEs reached their highest in more than a decade.
Yet in 30 years of forecasts collected by IBES, only twice have S&P 500 companies delivered earnings higher than was first predicted by Wall Street. To repeat the feat would require either that forecasts are subdued, as those made in 2003 were by the memory of recession, or a late-cycle profits boom, as happened in 2006 as leverage and the subprime bubble fueled growth.
Both are possible. Earnings have gone nowhere for two years thanks to the collapse in profits in the oil (http:// www.wsj.com/articles/low-crude-prices-hammer-big-oil-companies-1469806903) and banking sectors, whose outlooks are being reassessed by analysts. If that recovery continues--and it can't hurt that Mr. Trump has picked Big Oil and Goldman Sachs(GS) executives for top cabinet positions (http://www.wsj.com/articles/what-trumps-cabinet-picks-mean-for-markets- 1482422691)--it will underpin profits for the wider market.
Mr. Trump's stated plans could lead to a bout of economic exuberance, too. Despite near-full employment, he wants an unfunded tax cut and big infrastructure spending, the latter mostly from the private sector. In the short run, this should help the economy, boost revenues and thus bolster profits, even if focusing tax cuts on the rich (http:// www.wsj.com/articles/analysis-of-trumps-tax-plan-shows-big-cuts-in-taxes-federal-revenue-1450807194) achieves much less than a broader-based cut. In the longer term, of course, fiscal stimulus would raise inflationary pressures and the danger that the Federal Reserve is forced to raise rates to compensate. But that's a concern for another day.
Unfortunately for investors, it's far from clear how much stimulus will be injected into the economy or when it will come, let alone which sectors will benefit. As the Fed's December minutes released this week (http://www.wsj.com/ articles/fed-officials-in-minutes-cite-considerable-uncertainty-about-trumps-impact-on-economy-1483556499) put it, policy makers think it is "too early to know what changes in these [fiscal] policies would be implemented and how such changes might alter the economic outlook."
The rapid swing from defensive to economically sensitive stocks since the election shows investors are a lot more confident than the Fed in Mr. Trump's impact on the economy.
Still, lower corporate taxes seem a surefire way to boost earnings.
"[Calculating earnings] is a 20-variable problem, and we're all trying to isolate to one," said Adam Parker, chief U.S. equity strategist at Morgan Stanley. "But it's fair to say that the tax effect is the biggest effect [on earnings] ."
He thinks lower corporate taxes could add 10% to earnings by the end of 2018, while higher revenues from stimulus add about half that.
But he warns that about half of the tax gains are likely to be passed on to consumers or offset by other tweaks to the tax code, while the stronger dollar could wipe out almost half the benefit of stimulus.
At the moment, the consensus of analysts predicts earnings growth of about 12% this year and next. That's the most optimistic they've been at the start of a year since January 2011, when earnings growth of 13% was expected for each of the next two years. Earnings growth hit that mark in 2011 but fell far short in 2012.
Perhaps this time the optimism will prove justified. The clear danger is that once Mr. Trump's plans hit congressional reality, they will be watered down or take longer to implement--and that investors aren't prepared for such setbacks.
Write to James Mackintosh at James.Mackintosh@wsj.com (mailto:James.Mackintosh@wsj.com)
These stock-market sectors will be the most volatile in 2017: Goldman Sachs MARKETWATCH 3:27 AM ET 1/6/2017 Symbol Last Price Change GDX 23.2 0 (0%) GDXJ 37.1 0 (0%) XBI 62.47up 0 (0%) QUOTES AS OF 08:00:00 PM ET 01/05/2017 Gold miners and biotech stocks could continue seeing big swings in the new year
Investors in two of 2016's wildest sectors won't be getting a break from big swings in the new year.
Exchange-traded funds that track gold miners and biotechnology stocks, both of which saw massive daily moves last year, will remain "among the most volatile" in 2017, according to a Goldman Sachs analysis of the options market.
"Gold miners posted the best 2016 performance across our ETF universe, whether judged on an absolute or risk adjusted basis, and the options market is pricing in another big year for volatility for the VanEck Vectors Gold Miners ETF(GDX) and the VanEck Vectors Junior Gold Miners ETF(GDXJ) ," the firm wrote in a note to clients.
According to Goldman's analysis, the Gold Miners ETF could see a swing of as much as 34% in the coming year--either to the upside or the downside--while the Junior ETF, which focuses on small-cap companies in the space, could see a move of 44%.
While there are a variety of options strategies that investors can employ, a popular one is to use a "straddle," where a call option and a put option are purchased at the same strike price. This is a bet that a security will move by a certain amount, rather than in a specific direction. A call option gives the holder the right but not the obligation to buy a security at a specific strike price. A put option gives the holder the right but not the obligation to sell at a specific strike price.
Both mining funds saw big gains last year, with the large-cap ETF up 52.5% and the Junior fund soaring more than 64%. They easily exceeded the 8.6% gain in the price of gold , thanks to cost-cutting and improved margins (http:// www.marketwatch.com/story/investors-dig-into-mining-etfs-as-metals-rally-2016-09-02). Despite that, the funds are heavily correlated to moves in commodity prices, which could lead to the volatility Goldman expects in 2017. By some forecasts (http://www.marketwatch.com/story/2017-is-the-year-gold-drops-below-1000-2016-12-28), gold could fall below $ 1,000 an ounce this year; it is currently trading around $1,174. Others remain bullish on the precious metal, citing uncertainty (http://www.marketwatch.com/story/grab-some-gold-because-the-fed-cant-figure-out-trump-the-metals-fans-say- 2017-01-05) over President-elect Donald Trump and the U.S. Federal Reserve.
Opinion:How gold-mining stocks could potentially double in 12 months (http://www.marketwatch.com/story/how-gold- mining-stocks-could-potentially-double-in-12-months-2016-10-10)
According to Goldman's analysis, the options market is pricing in a move of 23% for the iShares fund and of 31% for the SPDR fund. While the move could again to be to the upside or the downside, Goldman noted that "sentiment is bullish" for the sector.
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