2017 stock market outlook
Feb 28, 2017 11:37AM
By Ben Scott
by Angelo R. Imbrogno
Earnings are the key to 2017 stock market outlook. S&P 500 earnings passed an important milestone in 2016, returning to growth in the third quarter after mildly contracting for several quarters during an extended mid-cycle earnings recession. Expected mid- to high-single-digit earnings gains from corporate America in 2017 should help support the continuation of the nearly eight-year-old bull market for U.S. equities, and we expect mid-single-digit returns for the S&P 500 in 2017, consistent with historical mid-to-late economic cycle performance.
In addition to earnings growth, we expect those gains to be driven by: 1) a pickup in U.S. economic growth, partially due to fiscal stimulus, 2) stable valuations as measured by the price-to-earnings ratio, and 3) an expansion in bank lending. However, gains could come with increased volatility as the economic cycle ages further and interest rates may rise, increasing borrowing costs and making bonds a more competitive alternative to stocks. Risks to our forecast include:
— a sharp rise in inflation that leaves the Fed playing catch-up
— a trade war with key U.S. trading partners
— a policy mistake, domestic or foreign, that causes a recession or significant market disruption.
Earnings picking up
Earnings growth returned in late 2016 and may continue to gain momentum in the coming year. We expect earnings growth in the mid to high single-digits in 2017, well above the flat earnings of 2016 and more consistent with long-term averages. Better economic growth, potentially the fastest since the end of the Great Recession, would be supportive of corporate profits
Energy sector profits return
After more than two years of declines, we expect earnings growth to return to the energy sector in the fourth quarter of 2016 (to be reported in early 2017). Falling oil prices and the corresponding energy downturn were a significant drag on overall U.S. corporate profits in 2015 and 2016
U.S. Dollar impact may be minimal
We expect any further rise in the U.S. dollar in 2017 to be contained, although we do consider currency to be one of the bigger risks to earnings for the year.
Profit margin headwinds
Overall, corporate profit margins have been resilient despite the energy downturn as companies have done a terrific job controlling costs. Wage pressures are starting to build and may continue to do so in 2017 should steady job growth continue. Minimum wage increases in some states add to the upward pressure, along with the potential for higher borrowing costs as interest rates and commodity prices rise.
Imbrogno is president of Blue Diamond Wealth Management, Inc.
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