Strong earnings growth, which has driven stocks all year, should continue into 2018, setting up another good year for the stock market, said Jeffrey Kleintop, chief global investment strategist at Charles Schwab.
In an interview with Business Insider, the executive at The Charles Schwab Corporation (SCHW) said that 2018 will mark the first time in which there are back-to-back years of broad global economic growth in more than a decade. "Every one of the world's 45 largest economies is going to grow next year, which means further earnings growth," said Kleintop, noting that strong earnings growth throughout 2017 was the secret to the rise in stocks. He did caution that, with yield curves starting to flatten out, there is a chance of a recession in 2019.
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As for risks in 2018, Kleintop pointed to a slowdown in economic growth in China that could shock the rest of the world, as well as natural disasters and geopolitical issues that may pressure stocks. None of those things affected stocks in 2017, with investors shrugging off any non-investment news.
Liz Ann Sonders, senior vice president and chief investment strategist at Schwab, did warn in a recent blog post that buying on the rumor and selling on the news could be in vogue next year. "We believe we remain in a secular bull market and the runway between now and real trouble for either stocks or the economy remains relatively long," wrote Sonders in a blog post. "However, for reasons including the possibility of a 'buy on the rumor, sell on the news' period around the likely passage of tax reform – and the possibility it doesn't boost earnings growth significantly – some bumps along the runway should be expected."
For 2018, Kleintop said that one of the best ways to play the markets is for investors to "go global" but be diversified in their investments. In the past, investors would look to a particular sector or country when investing outside the U.S., but with the correlations between how countries behave relative to each other down for the first time in 20 years, investors have to be broad based in their investment choices.
As for tech stocks, which already have lofty valuations, Kleintop said there is more room for growth next year, but it may be focused on corporate technology rather than consumer technology thanks to the tax reform bill, which cuts the corporate tax rate to 21%. Given the potential for more businesses spending, tech companies that cater to the corporate market stand to benefit, he said, noting that valuations are not as high on that side of tech.