2017 unlikely to repeat its early stock highs
Investors jazzed up by the sizable swelling of their 401(k) balances in the first half of the year might want to lower their expectations for the rest of 2017.
Stocks rose sharply in the first six months of 2017 as the broad market rose 8%, outstripping the return most Wall Street strategists predicted for the full year and doubling the average 4% January-June gain since World War II, according to research firm CFRA.
But the best days for the stock market this year may already have occurred, many Wall Street pros say.
Gains could be capped by a market that’s gotten too expensive, political gridlock, an economy not growing fast enough and fears that top-performing tech stocks will cool off. Last week, tech took a beating as the Nasdaq composite tumbled 1.4% Thursday and investors feared share prices in the industry had grown too pricey compared with earnings.
“It’s hard to imagine the second half being as good as the first,” says Bill Stone, global chief investment strategist at PNC Asset Management.
And the start of the year was very good. The Dow Jones industrial average topped 20,000 for the first time and made 22 record highs. U.S. companies posted their best quarterly profit growth in six years. Electric-car maker Tesla eclipsed GM as the nation’s most valuable auto company.
Tech stocks have shone the brightest. The Nasdaq — powered by 25% to 30%-plus gains from tech giants such as Apple and Facebook — surpassed the 6,000 milestone. Amazon and Google parent Alphabet joined the “$1,000 Stock Club,” only to end the quarter a bit short of the mark.
Gains of that size aren’t likely to persist, analysts say. It’s possible prices will be lower by year’s end than they are now. The most bullish Wall Street strategist believes the market can climb 7.3%. The least optimistic prognosticator sees the market falling 6.1% from here.
Investors might benefit from investing some 401(k) money overseas. Investment opportunities may be better in foreign stock markets, such as Europe and emerging markets, where economic conditions are improving and stocks are trading at cheaper prices relative to earnings, Wall Street pros say.
What’s behind the more muted outlook for U.S. stocks?
A lot of good news and optimism are already reflected in higher stock prices, which are now expensive relative to earnings based on history.
Uncertainties related to the pace of U.S. economic growth, political dysfunction in Washington and interest rate policy could also limit the rise of stock gains in the next six months.
There’s also a feeling among investors that the market’s fast start has stolen from gains that might have come later this year.
Few stock strategists on Wall Street expect stocks to repeat their good fortune in the final six months of 2017, despite CFRA research that shows stocks have posted average gains of 5.1% in the final six months of the year after rising 7% to 12% in the first half.
“The market has run as far as it is gonna run,” says Brian Nick, chief investment strategist at TIAA Investments, noting that his prediction for a full-year market gain of around 7% has already been eclipsed.
Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, expects stocks to suffer “modest” declines the rest of 2017. He sees the market ending the year up 5% or 6%, or mid-single digits.
Jonathan Golub of RBC Capital Markets, the street’s biggest bull, thinks the market will be 6% or 7% higher at years-end, driven by an economy that’s in little danger of recession. He says the market can climb another 7% or so.
Still, the market’s success has
raised the hurdles it faces.
The market’s main obstacles include:
u Disappointing data. When it comes to key data points Wall Street looks at when evaluating upside potential for stocks, it’s possible that the best economic numbers of 2017 might already be behind us — or at least less robust than envisioned.
The U.S. economy could also disappoint. GDP, which was expected to pick up sharply after sluggish 1.4% growth in the first quarter, hasn’t reaccelerated as quickly as hoped.
Second-quarter growth is now tracking at 1.9%, Barclays says, which is below trend and less than forecast. “U.S. data has been kind of ugly lately,” says TIAA’s Nick.
The good news? Nothing in the data suggests the U.S. will “tip into recession,” Stone says.
u Pricey shares. The market’s big gains this year have pushed the S&P 500’s valuation up 18.1 times expected earnings for the next four quarters, which is 25% pricier than its long-term average, Thomson Reuters data show. “Prices are stretched,” says Well Fargo’s Wren.
u Fed fears. The U.S. central bank seems poised to boost short-term interest rates a third time in 2017 and to start paring back its $4 trillion-plus bond portfolio later this year despite weak inflation data and a recent spate of soft economic data. Both Fed moves mean less stimulus for the economy and markets.
u Policy gridlock. The second half outlook is also clouded by uncertainty that the Trump administration will get much of its stimulus agenda passed. Big tax cuts for corporations, which would boost profits, are what Wall Street wants. But if that tax policy reform stalls or is pushed out to 2018, it would lead to disappointment.