Sectors to Watch in Trump's State of Union Speech

Which version of Donald Trump will show up to speak at Tuesday night’s State of the Union speech? Investors are hoping it’s the relatively restrained businessman who stuck to his teleprompter in Davos. They’ll be keeping an eye on the president’s remarks about infrastructure and defense spending, financial deregulation and housing policy, immigration, welfare and trade. There will probably be little said about health care and Puerto Rico.

Here’s what to watch:

Infrastructure

Melius Research is looking for “the sizing of infrastructure stimulus and any clues on what will be emphasized,” along with timing and budgeting details, CEO Scott Davis said in an email to Bloomberg.

Trump is expected to outline a $1.7 trillion plan that may boost federal infrastructure spending by 33 percent in 2019 and 2020, and extend federal spending to 2028, Jefferies analyst Philip Ng writes in a note. Even so, “there are still a lot of questions around funding and the ability to pass the bill.”

A narrow infrastructure package might be enacted, “but the ~$1.7 trillion headline figure appears wholly unlikely given funding concerns and political headwinds,” Compass Point’s Isaac Boltansky writes in a note.

Steel and aluminum may move if Trump discusses infrastructure spending, Bloomberg Intelligence analyst Andrew Cosgrove says. U.S. steelmakers may benefit, particularly given a pending Section 232 report on steel and aluminum imports that could lead to tariffs. Watch companies including Nucor Corp., Commercial Metals Co., and Steel Dynamics Inc., as infrastructure spending could drive demand for materials.

Highlighting U.S. government plans to build a national 5G wireless network may be positive for tower REITs like American Tower Corp., Crown Castle International and SBA Communications Corp. If such a nationalized network were to be announced, it could be negative for telecom carriers like AT&T Inc. and Verizon Communications Inc. that have their own 5G plans.

Defense

Investors are looking for any update on defense spending, as Trump is expected to ask for $716 billion in defense spending while unveiling his budget plan, a 7.2 percent increase over last year’s defense budget. U.S. officials confirmed the figure on Friday, and aerospace and defense stocks extended their record highs on Monday.

Financials

Banks may be in the spotlight as they’ve outperformed the broader market since Trump’s election, with the KBW bank index up 55 percent since November 8, 2016, with top gainers including Band of America Corp., which has nearly doubled in that time.

Trump may highlight efforts at the Federal Reserve to lessen the regulatory burden on banks. He may also reference Senate Banking Committee Chair Mike Crapo’s bank deregulation bill or Mick Mulvaney’s work at the Consumer Financial Protection Bureau on prepaid cards, debt collection and payday lending, Height Securities’ Ed Groshans says in an email to Bloomberg. It’s also possible Trump will bring up housing finance reform, and may surprise listeners by addressing affordable housing funding.

Economic policy commentary is likely to focus on “broader themes,” like the stock market’s rally, low unemployment rates and early corporate responses to tax overhaul, Compass Point’s Boltansky writes. Trump’s speech is less likely to outline more populist economic themes, like a big-bank tax, a revival of the Glass-Steagall Act or expanding student-loan debt.

“If ‘over-regulation has been taxation,’ per Trump at Davos, ‘swamp tax relief’ seems ahead for small to mid-sized banks,” Capital Alpha’s Charles Gabriel writes. The banks’ quest for modest changes to Dodd-Frank may be helped if it gets a nod in the address.

Retail

Discounters and grocery stores including Wal-Mart Stores Inc., Dollar General Corp., Dollar Tree Inc., Big Lots Inc., and Kroger Co. may trade lower if the president pushes for social spending overhaul, Bloomberg Intelligence analyst Jennifer Bartashus says. The last time there was a major cut to spending on benefits, such as the Supplemental Nutrition Assistance Program -- better known as food stamps, those retailers saw revenue from lower-income households contract. SNAP recipients often shift spending to lower-priced products, including private-label goods, to help offset declines in benefits; longer-term, retailers may experience some margin pressure if they need to keep prices low to cater to price-sensitive customers.

Puerto Rico, health care

Puerto Rico and health care are two high-focus areas that aren’t likely to draw much attention in Trump’s remarks. There may be “a brief focus on disaster assistance,” but the president probably won’t offer “meaningful commentary on Puerto Rico’s debt burden,” Compass Point says. Based on what the White House has telegraphed about the speech, improving the health care system -- which garners the highest public interest per a Politico poll -- won’t be a major focus, Capital Alpha says.

Private prisons

Investors may also be listening for law-enforcement comments after reports of a memo detailed U.S. Justice Department plans to make greater use of privately operated facilities to alleviate overcrowding at federal institutions. The news sent shares of private-prison operators CoreCivic Inc. and GEO Group Inc. surging on Friday, although the stocks reversed their gains on Monday.

Trump’s tone

Trump’s speech in Davos probably “served as a prelude” for the State of the Union address, Oppenheimer Chief Investment Strategist John Stoltzfus writes. He’s looking for remarks on infrastructure, which is likely next on the administration’s stimulus agenda.

The speech will probably be “heavy on patriotism and the president’s theme of making America great again,” KBW’s Brian Gardner writes in a note. “We also expect the speech to be mostly upbeat when compared to the dark tone of the president’s inaugural address last year”, which KBW attributes that to adviser Steve Bannon’s departure from the White House. Watch for a focus on immigration, infrastructure spending and national defense, “a victory lap” on the tax law and little on financial regulation and mortgage finance.

Cowen’s Chris Krueger expects a speech similar to last year’s Joint Address to Congress, “delivered by Teleprompter Trump” and generating “solid reviews albeit with a decidedly low bar.” He notes “both Teleprompter Trump and Twitter Trump appeared in Davos.” Trump’s “style swings wildly, but the substance is largely the same: America First blended with Calvin Coolidge 2.0: The business of America is business.”

— With assistance by Janet Freund, Aoyon Ashraf, Esha Dey, Cristin Flanagan, and Stephen Sweeney

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