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Market Update: 12-04-17

2018 STOCK MARKET OUTLOOK: DOUBLE-DIGIT RETURNS?

John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial

Back to business: fundamentals to drive stock market gains in 2018. With a focus on business fundamentals and the impact of fiscal policy, the return of the business cycle means that earnings growth may have to shoulder most, if not all, of the load if stocks are going to produce attractive returns in 2018. The good news is the S&P 500 Index may be well positioned to generate earnings growth at or near double-digits in 2018 thanks to a combination of better economic growth and potentially lower corporate tax rates, despite some possible downward pressure on profit margins from higher wages. We also expect the stock market’s price-to-earnings (PE) multiple, at 19.5 times trailing earnings, to hold steady (or drop slightly) in 2018, as the economic cycle ages, inflation picks up modestly, and central bank policy tightens further*. Risks to our stock market forecast include Congress failing to pass a tax agreement (a low risk after Senate passage over the weekend), a potential policy mistake by a central bank, and political uncertainty around the midterm elections.

EARNINGS COULD BE STRONGER THAN EVER

After three straight years (2014–2016) of basically flat S&P 500 operating earnings, at around $118 per share, consensus estimates project $131 earnings per share (EPS) for 2017 and $146 per share for 2018. Earnings are supported by better global economic growth, including a pickup in business spending and robust manufacturing activity, normalized inflation (near 2%), and stable operating margins, even with some modest wage and other input cost pressures. Should tax reform, or even just a lowered corporate tax rate, be achieved, earnings may get another...

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