While investors in every asset class will be hanging on President Donald Trump’s speech to Congress Tuesday, it’s those who have furiously bid up equities -- in hot-topic sectors like financials, retail and health care -- who may have the most on the line.
The oration, carrying all the policy gravitas of a State of the Union address, is expected to touch on budget goals, tax reform and trade. Considering that almost every utterance from Trump has roiled companies and industries over the past few months, swings in equities are a safe bet. Here’s what to watch:
1. Financials
Financial stocks were the big post-election winner in the S&P 500, surging 23 percent since Nov. 8, including 14 percent in November alone. Investors have been bullish on the prospect of higher interest rates and looser regulations. Trump has specifically proposed a rollback of the Dodd-Frank Act. The group slid 0.4 percent at 9:43 a.m. in New York.
Since finance stocks have risen in tandem with bond yields, a central concern of bank investors will be the overall credibility of Trump’s stimulus plans, from infrastructure to tax cuts. Wall Street firms have been juiced by deregulation talk so any discussion of the Dodd-Frank Act could move the group “Investors want to see that the economy ranks high on the to-do list,” former CLSA analyst Mike Mayo said in a Feb. 26 e-mail. “The further up that he talks about the economy, the better it is for banks” About half of the largest 26 banks would benefit from legislation allowing net interest income to be reported for tax purposes if the tax rate is 30 percent or lower, while the other half would decline, Edwin Groshans, an analyst with research firm Height Securities wrote in a Feb. 24 noteSays companies expected to benefit most are MTB, SYF, ZION, DFS; while FRC, KEY, HBAN are seen doing the worst Fund managers are still underweight the sector and the potential exists for more gains, Bank of America Merrill Lynch head of U.S. equity strategy Savita Subramanian wrote in a report on Feb. 24. Fund managers have already consistently increased their exposure to financials over the past few months, she noted Through Friday, the group’s biggest gainers since the election were AMP, BAC, RF, HBAN, ZION, CMA, LUK, CFG, GS -- all up more than 35 percent.
2. Retailers
The industry has trailed the S&P 500 since the election, rising 8 percent versus an 11 percent gain for the benchmark. After climbing more than 6 percent in the month following the vote, retailers limped into year-end as speculation mounted that Trump would impose a border tax. Investors expect the measure to hurt profits for retailers that sell goods manufactured overseas.
Trade policies in the form of tariffs against Mexico and China are the policy base case for Barclays, although it doesn’t expect change until 2018, the firm’s chief European economist Antonio Garcia Pascual wrote in a Feb. 24 note Taking border tax off the table “significantly cuts” the downside risk facing apparel and footwear companies, Bloomberg Intelligence analyst Chen Grazutis said last month The border tax is a “material tail risk” for hard-line retail companies and could wipe away profits for most, Morgan Stanley analyst Simeon Gutman said in January Through Friday, the sector’s biggest winners since the election were FRED, TLRD, HZO, GPI, PLCE, KMX -- all up more than 35 percent.
3. Building and engineering companies
The stocks initially soared on Trump’s pledge to rebuild U.S. infrastructure, with companies like Jacobs Engineering Group Inc., Eagle Materials Inc. and Headwaters Inc. rising more than 20 percent in November alone. However, patience has worn thin over the past month, with a Bloomberg index of infrastructure stocks slipping 5 percent.
Trump may address how much he wants to spend on infrastructure and how it should be paid for, although he hasn’t yet given the proposed measure a strong enough endorsement, Thomas Lee, managing partner and co-founder of Fundstrat Global Advisors, wrote in a Feb. 24 note Policy in tax reform, infrastructure and defense spending, trade agreements and immigration all have the potential to move industrial company valuations, Bernstein analyst Steven Winoker said in a Feb. 27 e-mailTrump’s budget outline showed increase of $54 billion for defense spending and sent the 11-member S&P 500 Aerospace and Defense Index to a record high on Monday The possible effect of a delayed infrastructure bill was seen on Feb. 23, when the sector dropped 1.6 percent amid a report that it may have to wait until 2018 because of a crowded congressional to-do list Through Friday, the group’s biggest gainers since the election were PWR, HW, FLR, USCR, EXP -- all up at least 19 percent.
4. Health-care companies
Health-care stocks in the S&P 500 climbed immediately after the election on expectations that Trump and a Republican-controlled Congress would roll back regulations. Since then, industry shares have recovered from two declines of more than 3 percent and now are at the highest since August.