Equities Midyear Outlook 2017: Business Fundamentals Back at the Controls

As investors increasingly trust that the economy can stand on its own without the need for monetary policy support, business fundamentals should take over as the primary market engine and corporate profits will take on increasing importance. As we note in our just-released Midyear Outlook 2017: A Shift In Market Control publication, we have confidence in that new lever—corporate America—to support stocks in the second half of the year and potentially add modestly to year-to-date gains.

Some of the highlights from the equity section include:

  • Our 6-9% S&P 500 total return forecast is driven by: 1) our expectations for a pickup in economic growth, 2) mid-to-high single-digit earnings gains, 3) a stable price-to-earnings ratio (PE) of 19-20, and 4) prospects for a fiscal policy boost to earnings in 2018.
  • In 2017, we expect solid gains in corporate profits, driven by potential improvement in economic growth, resilient profit margins, a stable U.S. dollar, and rebounding energy profits.
  • At 19 – 20 times trailing S&P 500 earnings, stocks are expensive relative to their long-term history. However, when viewed against interest rates and inflation still near historic lows, valuations look fair to us.
  • Additional clarity on corporate tax reform in the coming months will provide further insight into 2018 profit growth and potentially justify elevated stock market valuations.

Investors should feel good about where the stock market is at the halfway point of 2017. We believe the economic expansion may be poised to continue and, powered by business fundamentals, this eight-year-old bull market could potentially continue as well. Fiscal policy may not help much this year, and there may be bouts of volatility as monetary conditions tighten further, but we think stocks are in a good position to possibly deliver modest additional gains in the second half of 2017, even as the Federal Reserve continues powering down monetary policy support.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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