Many fund managers, undeterred by a richly valued U.S. stock market, see the major indexes rising to new records in 2018, Barron's reports. Among the 140 top investment professionals recently polled by Barron's, Michael Genovese stands out as especially bullish. A co-founder of wealth management firm Genovese Burford & Brothers, which has $2.5 billion under management, he predicts that the Dow Jones Industrial Average (DJIA) will approach 26,000 - his specific target is 25,750 - by the end of 2018. That's 12% above the 23,000 mark, which was reached on Tuesday.

Even Nobel Prize-winning economist Robert Shiller of Yale University admits that the markets may have some further upside potential, per a lengthy interview in Barron's. While investors have absorbed months of warnings about historic overvaluations, including from Shiller himself, investors nonetheless are caught up in "pro-business narrative" surrounding President Trump and his policies, Shiller says. "People aren't in the frame of mind that we should worry about a crash," he tells Barron's. Shiller appears bullish even though his favorite indicator of market valuation is registering high risk for equities: the cyclically adjusted price-earnings ratio (CAPE), also called the Shiller PE Ratio.

Increased Bullishness

The latest iteration of Barron's semi-annual Big Money Poll has only 37% of respondents saying that the U.S. stock market is overvalued, down from 44% six months ago. Money managers who rate their outlook as bullish have actually risen during those six months, from 51% to 61%. A perhaps unsettling statistic: fund managers said that only 18% of their clients appear to be bullish right now.

Managers rating themselves as bullish project that the major U.S. market indexes will end 2018 at new record levels. The consensus forecasts among the bulls are, with their implied increases from Tuesday's opening: Dow Industrials, 23,675, up 3.2%; S&P 500 Index (SPX), 2,678, up 4.7%; Nasdaq Composite Index (IXIC), 6,921, up 4.5%.

Tax Reform and Profits

Expectations that Congress will enact tax reforms in the next 12 months are shared by 87% of respondents. Largely as a result, 94.2% project that U.S. corporate profits will rise in the next 12 months.

The main driver of corporate profits, however, is the economy. A growth rate of 2.5% or better in U.S. GDP during the next 12 months is anticipated by 72% of respondents. GDP grew at a 3.1% annualized rate in the second quarter of 2017, up from 1.2% in the first quarter, according to the Bureau of Economic Analysis (BEA), a unit of the U.S. Department of Commerce. Meanwhile, 73% of respondents predict that the global economy will improve during the next 12 months. That's good news for U.S. companies that export, or that have operations abroad.

Regarding the price of oil, the consensus is that it will be $52.88 as of June 30, 2018, little changed from the current spot price. That essentially means that the status quo will persist for energy producers and consumers alike, in terms of revenues and costs, respectively.

Inflation and Interest Rates

Inflation is a minor concern, with only 2% of respondents predicting that it will reach a 3% annual rate within the next 12 months. The consensus forecast is 2% inflation. As far as the Federal Reserve's response goes, a majority of those polled anticipate one more rate hike in 2017, followed by two in 2018. By the end of 2018, the Fed Funds Rate will be in the range of 1.5% to 2.0%, per 71% of money managers. The Effective Fed Funds Rate (EFFR), a volume-weighted median of actual Fed Funds transactions, is currently 1.16%, per the Federal Reserve Bank of New York.

Shiller's Big Concerns

Given the near-unanimous expectation among money managers that corporate tax reform will become a reality, it is highly likely this already has been priced into stocks, Barron's says. This creates downside risk for stocks should a disappointing tax bill, or none at all, finally emerge from Washington, Barron's adds. 

Shiller, meanwhile, tells Barron's that his favorite indicator of market valuation is registering high risk for equities. His cyclically adjusted price-earnings ratio (CAPE), also called the Shiller PE Ratio, compares the value of the S&P 500 to average inflation-adjusted earnings over the prior ten years. Its current reading of 31 only was exceeded by 32.5 in 1929, prior to the Great Crash, and by 44 in late 1999, during the Dotcom Bubble, Barron's says.  Shiller adds the stock market crash of 1987 was triggered when significant numbers of investors started believing that the market was overpriced.

Concerns about high stock valuations in 2017, though, have yet to derail the current bull market.

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