You Got to Know When to Hold ‘Em
By John Stoltzfus,
Chief Investment Strategist
2018 S&P 500 Price Target and Forward Commentary
As the calendar rolls into year-end with the S&P 500 hovering around our $2650 target (initiated on July 31st 2017), we provide a 2018 outlook with estimates and projections. While our original year-end 2017 target of $2450 (initiated in mid-December of 2016), was crossed in mid-June, we believe our revised target of $2650 from last July has opportunity to be realized by year-end.
Going forward we expect many of the same thematics from 2017 to apply in the New Year as investors look to determine whether improving economic conditions and corporate fundamentals can boost stock markets higher for a third straight year.
With bears and skeptics having found ample opportunities to curb investor enthusiasm as markets notched numerous all-time highs in 2016 and 2017, we look to remind our readers that bull-markets do not have expiration dates but rather often turn on expectations of a slowdown in the economy, an actual slowdown in the economy, weakening of corporate fundamentals, or deterioration in credit.
We believe the expectation of 2–2.5% GDP growth in the long-run, a strong employment picture, accommodative monetary policy and modest inflation without signs of overheating offers an economic landscape that provides further support for additional gains in equity prices in the year ahead.
With Q3 earnings season having shown ~9.8% growth in year over year operating earnings, the S&P 500 has now delivered five consecutive quarters of EPS growth. Bottom-up estimates for Q4 2017 point towards double digit year-over-year growth and we continue to believe 2017 operating earnings will end the year at $129.
We initiate a year-end 2018 price target for the S&P 500 of $3000 or 20.5x our 2018 EPS estimate of $146. While we do not directly take into account potential growth from tax reform as conclusions are yet to be arrived at by legislators in Washington, we believe an expected reduction in tax liabilities and opportunities for repatriation and deregulation would ultimately support margin expansion or share buybacks.
We place a 20.5x multiple on 2018 earnings as we continue to believe the relative/risk reward for US equities remains attractive. Low inflation—which we believe to be a result of an increase in technology and globalization—have kept long-term rates in check, flattened the yield curve, and even resulted in greater near term risk for bonds than for equities.
We believe 20.5x 2018 earnings can be reached as the Fed and other central banks around the world deliver a process of interest rate normalization with less disruptive results for markets than many expect. We remain constructive on further improvement for corporate fundamentals and see opportunity for growth in both the top and bottom-line. We expect forward guidance from corporate management teams to remain positive as global economies continue to improve at a sustainable rate of growth. US multinationals should benefit from this process particularly should the dollar remain at relatively moderate and competitive levels.
In our opinion skeptic and bear capitulation appears to have just begun in the fourth quarter of 2017 and contributed to the number of this year’s equity benchmark record highs. We believe that it is early in this process and multiples could expand further than we currently anticipate should the capitulation gain momentum.
Estimate Summary & Recommended Sector Allocation
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