Market update

Anthony Saglimbene, Ameriprise Global Market Strategist

As of 1/10/2018

Looking back

  • The Dow Jones Industrial Average logged its fastest thousand-point gain in history
  • Over the past year, the Dow has surpassed five, thousand-point milestones — a record for the 120-year old stock market barometer
  • Since March 2009, the S&P 500 Index has advanced more than 300%    

Up ahead

  • Favorable corporate and economic trends across the globe could accelerate in 2018
  • The benefits from corporate tax reform could increase profitability for many U.S. companies    
  • Although optimism runs high, investors should maintain a well-diversified portfolio

Data Source: FactSet

Market Update: Your portfolio in the new year

With the arrival of the new year, investors are reevaluating their investment strategies. How can you help position your portfolio based on market conditions?

Stocks benefit from strong tailwinds

Asset prices are ringing in the new year much in the way they finished 2017— up and to the right. Just days into 2018, the S&P 500 Index, Dow Jones Industrial Average and Nasdaq hit fresh all-time highs.     

In our view, global stocks still have some gas left in the tank. We are forecasting that the S&P 500 Index will climb 7.5% compared to the end of 2017 – finishing at a level of 2875. That’s healthy, but also far below what the market delivered in 2017. We believe synchronized global growth, better corporate earnings trends, rising confidence levels, and potential benefits from the new tax reform package all point to a healthy environment for equity prices this year. Be advised, however, that some of these factors may already be reflected in current stock prices.

Earnings continue to ramp up

Per the financial research firm FactSet, the estimated 2018 full-year earnings per share (EPS) growth rate for companies in the S&P 500 is 11.8% year-over-year. If full-year earnings expectations are achieved, it would mark the highest annual earnings growth rate for S&P 500 companies since 2011. Under the hood, all eleven sectors are projected to report growth in earnings, led by Energy, Materials, Financials, and Information Technology.

Importantly, if aggregate earnings and revenue estimates are realized this year, S&P 500 profit margins could also reach a highwater mark.

According to FactSet, the projected net profit margin for S&P 500 companies is +10.9% for this year. This would represent the highest level since 2008, when FactSet began tracking earnings and revenue data.

It is also worth noting that these estimates do not largely incorporate reforms from the Tax Cuts and Jobs Act. With the lower corporate tax rate this year (dropping from 35% to 21%) and changes to the tax structure for many multinational companies, we believe full-year earnings estimates for 2018 could move even higher through the first quarter.

Stay diversified and think globally in 2018   

As the year gets underway, growth and momentum stocks could continue to capture the bulk of investor interest. Conversely, high dividend yield and low price-to-earnings (P/E) stocks may see little investor interest if the market continues to rise.

Volatility was contained last year thanks to consistently positive news on the economy and corporate earnings. Although we begin 2018 with similar conditions, they aren’t etched in stone for the entire year. Markets could turn more volatile, particularly if the Federal Reserve’s interest rate hikes and other monetary tightening measures continue and there is a drop-off in market liquidity.

The degree in which corporate tax reform boosts profitability could also play a significant role in stock prices this year, particularly given their elevated valuations.

With this backdrop in mind, consider incorporating the following guidance when making adjustments in your portfolio for 2018:

  • At this point in the business cycle, maintain balance across investments and avoid becoming overly bullish on the prospects for “outsized” stock gains.
  • While it’s important to maintain a healthy dose of U.S. equities in your portfolio, relative value appears more attractive in Europe ex-U.K. and Asia. Compared to the U.S., we believe valuations are more attractive and monetary conditions easier.
  • Inside the U.S., value stocks pose opportunity for patient investors. We believe value style investing could see better trends in 2018.
  • We are also more favorable on U.S. small-cap stocks. These domestic companies typically face high corporate tax rates and could be beneficiaries of the relief that tax reform provides.
  • From a sector perspective, investors should favor cyclically exposed areas of the market over defensive areas but not to a significant degree. Financials, Materials, and Health Care appear to be the best-positioned sectors at this time.

The numbers

As of January 10, 2018

Data source: Morningstar Direct

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