It's (almost) official now. Earlier this week, The New York Times confirmed that President-elect Donald Trump has tapped Steven Mnuchin as his nominee for Treasury secretary when he takes over the White House in January. The former chief of finance for Trump's election campaign, Mnuchin is also a former hedge fund honcho, Hollywood movie financier -- and partner at investment bank Goldman Sachs (NYSE:GS).
If confirmed, Mnuchin will become the third such Goldman Sachs alumnus to serve as U.S. Treasury secretary. Meanwhile, in completely unrelated news, analysts at Deutsche Bank rushed out an upgrade on Goldman Sachs stock this morning.
Here are three things you need to know about that.
1. One reason bank stocks have rallied
Observing that the KBW Bank Index (DJINDICES:^BKX) has risen 15% in price since Trump won the election, Deutsche notes that the bulk of these gains can be explained by investors anticipating a rise in inflation, in interest rates, and consequently, in bank profits starting in 2017.
As related on StreetInsider.com today, Deutsche notes that both the large banks and smaller regional bankers that have powered strong gains on the KBW Bank Index are ones that are "well levered to rising rates." They boast large numbers of depositors, to whom they can pay low interest rates on their bank accounts, then turn around and reloan their money at more profitable, higher rates.
But according to Deutsche, this play on the KBW Bank Index is mostly played out, with "leverage to higher rates [already] mostly reflected in stock prices."
2. Phase 2 in the bank rally
In Deutsche's view, though, there's still a second aspect of Trump's impending presidency to consider: The potential for him to spark broad economic growth across the U.S. economy.
Deutsche estimates that real U.S. GDP will grow 3% in the first year of a Trump presidency, followed by accelerating growth in 2018 -- 3.3%. If this is how things play out, then banks less levered to bank deposits, and more toward such things as capital markets -- and stock and debt trading -- could benefit even more. And in this regard, Deutsche argues that "GS seems well positioned for a stronger macro environment given revenue upside, good cost control and a valuation below peers."
3. How much upside are we talking about here?
Deutsche argues that Goldman Sachs stock, currently selling for $219 and change, is worth closer to $255 in the high-growth scenario it paints for the pending Trump presidency. If Deutsche is right about that, then Goldman Sachs stock has about 16% upside from today's prices. Add in Goldman's modest 1.2% dividend yield, and the potential profit, one year out, rises toward nearly 18%.
The most important thing: Predicting the future is hard
Of course, all of this depends a lot on Deutsche Bank being right about President-elect Trump's ability to single-handedly goose the $18 trillion U.S. economy into a 3%-plus growth rate in the space of just a few short months. That's a pretty Herculean task they're setting for Trump, and I'm not sure I'd take such a growth rate as a given -- still nearly a month before the man has even taken office, much less introduced legislation to grow the economy.
In the meantime, looking at Goldman Sachs as it stands today -- sans economic miracle -- the stock is trading for a pricey 17.7 times trailing earnings, but expected (by most analysts) to grow those earnings at only 11.1% annually over the next five years.
Granted, if Deutsche is right, and the U.S. economy is about to surge, and grow not just 50% faster than it's managed to grow over the past seven years, but faster than many economists believe likely, then consensus estimates for Goldman Sachs' long-term growth rate may prove conservative. For the time being, though, the 1.6 PEG ratio tells me that Goldman Sachs stock is too expensive to recommend buying.