By Nigam Arora
The fundamental case for Dow 30,000 during Donald Trump's first term has strengthened as earnings season winds down.
Interestingly, this is happening at a time when, from a technical perspective, the stock market has staged a successful breakout of low volatility since the election. Still, there are two danger signs, as shown on the annotated chart. Please click here for the annotated chart.
The biggest single factor in the long-term direction of stocks is earnings growth. The current consensus for S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.08% operating earnings (often traded using the SPDR S&P 500 /zigman2/quotes/209901640/composite SPY +2.51% ), are $133 per share. According to the Arora Report’s analysis of Trump's proposals, tax cuts could add about $13 to S&P 500 earnings. Deregulation could add another $7. If gross domestic product growth were to accelerate to 4%, S&P 500 earnings could reach as high as $190 by the end of Trump's first term.
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 is now at around 2,351.)
For the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.11% , that translates to reaching over 33,450 by the end of 2021, Trump's first term. (The Dow is currently at 20,624.) Allowing for some hiccups, Dow 30,000-plus is doable.
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, denting company earnings.
No straight line
Even if the Dow reaches 30,000 in Trump's term, the trajectory wouldn’t be a straight line. As the chart, above, shows, the current breakout is happening on low volume, while the Relative Strength Index (RSI) is overbought and showing divergence from price action. Thus, a pullback is likely. If that were to occur, another rally would feature higher volatility.
Under that scenario, the stock market would be a strong trending market. And in a strong trending market, the Holy Grail is to buy stocks with good fundamentals as prices dip.
Here are 10 stocks investors should consider buying on dips: Applied Materials /zigman2/quotes/209393259/composite AMAT -0.89% , Amazon /zigman2/quotes/210331248/composite AMZN +0.03% , Bank of America /zigman2/quotes/200894270/composite BAC +2.94% , E*Trade Financial , Facebook /zigman2/quotes/205064656/composite FB +0.39% , Alphabet /zigman2/quotes/205453964/composite GOOG -0.43% or /zigman2/quotes/202490156/composite GOOGL -0.19% , J.P. Morgan /zigman2/quotes/205971034/composite JPM +2.32% , Micron Technology /zigman2/quotes/205710729/composite MU -1.18% , Royal Dutch Shell /zigman2/quotes/207682964/composite RDS.B +0.33% and T-Mobile /zigman2/quotes/204659678/composite TMUS +0.27% .
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com .