Global Growth On The Rise

1/16/2017


U.S. stocks have moved mostly sideways since mid-December, partly because investors have been reluctant to chase stocks without first getting a better read on corporate earnings and the changes likely in Washington. While choppy trading in the near term would not surprise us, we remain bullish on the U.S. stock market.

Optimistic expectations

December-quarter results and political wrangling in Washington are likely to dominate near-term trading. Estimate trends for the quarter are encouraging, with analyst revisions and company warnings both comparing favorably to historical norms. Still, investors will show keen interest in what executives say about the outlook for 2017, partly because expectations are fairly optimistic.

Consensus estimates call for per-share-earnings growth of 11.5% for the S&P 500 Index in 2017, up from the 0.2% expected for 2016, according to FactSet. Sales are expected to climb 5.9% in 2017, up from 2.2% in 2016.

Those numbers probably don't reflect much benefit from corporate tax reform or other legislative initiatives. But investors will be evaluating the progress of President-elect Trump and the Republican-led Congress, because expectations of lower corporate taxes and reduced regulation have contributed to the rally since Election Day.

Also, as analysts at J.P. Morgan Chase ($87; JPM) point out, consensus targets for 2018 probably do reflect at least some expectations for action in Washington. The S&P 500 Index trades at nearly 18 times expected 2017 earnings, above the 10-year average forward P/E of 14.4. Using the 2018 estimate, the forward P/E is about 16.

Earnings will also depend on conditions outside the U.S., as roughly 30% of the S&P 500 Index's revenue comes from overseas. Recent news on that front has been mostly positive, with improving growth outlooks for Europe and Asia countering the impact of a rising dollar. Foreign stock markets have rallied since November, as have economically sensitive commodities like copper.

Conclusion

The outlook for U.S. corporate profits continues to improve, as do projections for global economic growth. For now, with the Dow Theory in the bullish camp and reasonably valued growers available, our Focus List and Buy List have 100% in stocks. Our Long-Term Buy List has 94%, with the remainder in a short-term bond fund. For new buying, Lear ($144; LEA) has rallied but remains a top pick.


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