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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.

Angelo Imbrogno is president of Blue Diamond Wealth Management, Inc.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit.

Securities and advisory services offered through LPL Financial. Member FINRA/SIPC.