President-elect Donald Trump has been an outspoken advocate for natural gas and coal, which likely will keep gas and power prices low. We expect gas demand will continue growing, supporting infrastructure investment and earnings growth for many utilities. Low gas and power prices will continue to make the economics challenging for coal and nuclear generation. Environmental regulations, notably the U.S. Environmental Protection Agency’s carbon-focused Clean Power Plan, likely are dead at least for the next four years. This reduces risk for fossil-fuel generators.

We think renewable energy growth, especially wind energy, will continue despite the election rhetoric. State-level laws and regulations are driving most renewable energy investment, and we don’t expect that to change. We also think it is unlikely Congress will repeal the renewable energy tax credits. A pro-manufacturing agenda should help the wind energy supply chain that has developed in the U.S.

Defense Is the Sector Most Directly Affected

Earlier this year, we assessed four variables as key drivers for U.S. defense spending: the threat environment, the government’s fiscal health, the defense budget cycle, and politics. At the time, we posited that these factors were flashing green and that U.S. defense budgets were on the cusp of a sustained upturn regardless of the election. Nothing that has transpired since the election has changed this view.

Under a Trump administration, we do think defense budget growth will come in closer to our bull case, which envisions the total Department of Defense budget going above $650 billion in government fiscal year 2019. Moreover, near-term spending could move upward in the current government fiscal year 2017 as a result of an increase in overseas contingency operations funding. The prospect of a continuing resolution running well into next year has also been greatly reduced, and the resulting uncertainties surrounding defense funding and new program starts have also lessened, in our view.

From his policy speeches, we know that Trump advocates higher troop levels, more ships and submarines, and a greater number of fighter aircraft. Regarding specific programs, we think Trump will favor missile defense. Trump also appears to favor a robust modernization of the U.S. nuclear triad across programs.

We will get a more concrete view of Trump’s defense priorities when his administration issues its first budget request in February 2017. In addition to budgets and program priorities, Trump has criticized high-profile weapon systems, as largely unnecessary artifacts of special interests. This criticism combined with an already tough contracting environment suggests to us that investors’ positive knee-jerk reaction following the election might need to be tempered a bit.

Looking abroad, European and Asian allies may rethink their security arrangements with the U.S. under a Trump presidency. Trump has called for increases in defense spending from NATO countries and appears open to greater militarization across the Asia-Pacific region. We are convinced that our existing growth forecast for European defense budgets coupled with significant Asia-Pacific defense spending increases continues to be correct. These spending shifts should open more revenue growth opportunities for domestic defense contractors in Europe and Asia while also creating more international opportunities for U.S. firms. Unsurprisingly, European defense names were up strongly following the U.S. election.

TPP Won’t Matter for Autos, but NAFTA Does

Many automotive stocks declined the morning after the election. We think selling for now is due to massive uncertainty regarding what Trump will do on a variety of policies, and we will not be changing our auto fair value estimates on indiscriminate selling until we have more clarity on specific policies. If Trump succeeds in his anti-free-trade agenda, then we’d assume prices on all vehicles would go up over time.

We do not expect auto stocks to move a lot on TPP news. TPP would be favorable to Japanese automakers because the agreement allows them to source over half a vehicle from non-TPP nations, such as China, and sell it in the U.S. tariff-free. Should TPP fail to pass, it would be negative for Japanese automakers selling in the U.S., but regardless of trade agreements, firms must offer great product. TPP or no TPP, Japan is likely to remain effectively closed to American automakers, and the Japanese original-equipment manufacturers have a big share lead in many Southeast Asian markets that a trade agreement is unlikely to change.

In contrast to TPP, abolishing NAFTA would be bad for every major automaker because every major automaker uses Mexico, not only to import into the U.S. but also to export to Europe and South America. If production moves to the U.S. from Mexico this would increase production costs, which would decrease profits, hurt consumers who pay more for vehicles, and could make a dent in the U.S. automakers’ market share.

Trump is likely to push to lower nominal U.S. corporate income tax rates closer to levels in other advanced economies to dissuade companies from relocating overseas, shifting incremental investment there, or creating tax inversions. A Republican Congress may agree to reduce the tax avoidance motivation for firms to develop operations outside the U.S. Many industrials pay taxes in many jurisdictions, but the U.S. typically has the greatest statutory rate among developed nations. Reducing U.S. statutory rates would probably decrease cash taxes and increase value for most companies we cover, chiefly those with U.S. concentration, such as transports, waste haulers, industrial distributors, U.S. airlines, and homebuilders. Presently, we consider it too speculative to grant credit for this possibility.

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