With his first 100 days in office underway, President Trump is under close scrutiny. Expect passage of a tax holiday on repatriated corporate profits and an infrastructure spending bill, according to the Global Fund Manager Survey released by the Merrill Lynch division of Bank of America Corp (BAC) shortly after the election.  (For more, see also: Trump Will Get the Market’s 100-Day Report Card.)

In their report “US Equity Strategy Year Ahead 2017—the year ahead: Euphoria or fiscal fizzle?,” Merrill Lynch strategists offered a series of recommendations to investors for Trump’s first year.

Sectors to Buy or Sell

Merrill Lynch recommends being overweight in health care (these stocks are inexpensive and defensive), financials (should benefit from higher interest rates, lower investment taxes, and deregulation, and offer high dividend growth), telecom (their high dividends hedge against macro uncertainty), and consumer discretionary (individual tax cuts and stimulus spending should spur sales growth). 

Go underweight, Merrill Lynch says, in consumer staples (their multiples grew the most over the last five years, and they are hurt by rising rates and a strong dollar), utilities (near record high P/E ratios, hurt by rising rates) and materials (negative sales growth, hurt by rising rates and a strong dollar, also the most China-sensitive sector).

Risk From Leverage

Leverage (net debt divided by EBITDA) is at an all-time high for the Russell 2000 and increasing rapidly for the S&P 500 Index (SPX), according to Merrill Lynch. They exclude financial and tech firms in this analysis. Given rising interest rates and House Speaker Paul Ryan’s proposal to eliminate the deductibility of interest, Merrill Lynch advises investors to seek low-leverage companies with clean balance sheets.

Size, Value, Growth and Dividends

Mid caps are more expensive (on price to book value) and have weaker earnings growth than small caps and large caps, says Merrill Lynch. Small caps should gain the most from corporate tax reductions, and suffer the least from trade restrictions. (For more, see also: Small Cap Stocks Are Poised for Big Gains.)

Value stocks will outperform growth stocks in 2017, Merrill Lynch says. Also, when interest rates rise, stocks with growing dividends normally outperform high yielding stocks. They also are relatively less expensive now.

Taxes and Fiscal Stimulus

Tax rate reductions, Merrill Lynch believes, can be passed through the reconciliation process, avoiding a Democratic filibuster in the Senate. Meanwhile, sales revenues for the S&P 500, minus financials and energy, have been growing at a declining rate for two years. Turning this around may depend on fiscal stimulus, Merrill states. (For related reading, see also: Why Corporate Earnings Will Rattle the Market.)

Trade and the Dollar

Trump is likely to get trade restrictions, such as emergency tariffs and a renegotiated NAFTA, according to Merrill Lynch. This would raise costs, reduce profits, stifle consumer demand and possibly trigger stagflation. A rising dollar reins in inflation, but Merrill Lynch calculates that the net effect for the S&P 500 is reduced earnings. (For related reading, see also: How Trump’s Dollar Bashing May Hurt the Economy.)

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