Trump’s tax plan sets the stage for Dow $30 000

Investors who have written to me are excited about President Trump’s proposed tax plan. The kicker is that any tax relief would come on top of good company earnings (so far) this earnings season.

I’ve been asked for an optimistic long-term target for the U.S. stock market. So here it is: Dow DJIA, -0.10% 30,000 in five years. However, investors are well-advised to review all scenarios, not only the optimistic one.

Trump is expected to unveil basic principles of his tax plan Wednesday. He wants to cut the corporate tax rate to 15% from the current 35%.

The chart shows GDP growth going back to 1950. Trump has been talking about 4% growth in GDP, which, as you can see, is a tall order. It’s been attainable in the past, but not so much recently. Still, even if Trump doesn’t meet his own goal, the economy — and corporate earnings — would benefit.

The biggest single factor in the long-term direction of stocks is earnings growth. The fundamental case for Dow 30,000 has strengthened as risks have receded in Europe and amid excellent earnings from Dow Jones Industrial Average components Caterpillar CAT, E.I. DuPont de Nemours DD, McDonald’s MCD, 3M MMM, and American Express AXP.

Given the potential growth in the economy, in spite of the Federal Reserve’s plan to raise interest rates, the price-to-earnings (P/E) ratio may stay in the range of 18 to 21. A P/E of 20 applied to $190 in earnings leads to 3,800 in S&P 500. (The benchmark index as of this writing is 2,383.)

For the Dow Jones Industrial Average, that translates to reaching over 33,450 by the end of 2021, Trump’s first term. (The Dow is at 20,996 as of this writing.) Allowing for some hiccups, Dow 30,000-plus is doable.

Even if the Dow reaches 30,000, the trajectory wouldn’t be a straight line. To be sure, there are big risks. Trump might not be able to execute his plans, and he might start a trade war. Another risk is that the Federal Reserve ends up raising interest rates too quickly, eroding company earnings. In addition, there’s a chance a recession could occur before Dow 30,000. A recession could result in a year-long bear market.

Under this scenario, the stock market would be a strong trending market from a long-term perspective. And in a strong trending market, the Holy Grail is to buy stocks with good fundamentals as prices dip.

Here are 10 stocks already in The Arora Report portfolio investors should consider buying on dips:
- Applied Materials (AMAT)
- Bank of America (BAC)
- E*Trade financial (ETFC)
- Expedia (EXPE)
- Facebook (FB)
- Intel (INTC)
- J.P.Morgan (JPM)
- Royal Dutch Shell (RDS.B)
- T-Mobile (TMUS)
- Walgreens Boots Alliance (WBA)

It is important to hold a fair amount of cash at this time. Otherwise, when the market falls, you won’t have money to buy these stocks at better prices.

Source: Bloomberg

Jr Trader Petar Milanov

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