One of the most consistently bullish advocates of investing in stocks has been Jeremy Siegel, a longtime professor of finance at The Wharton School of the University of Pennsylvania and author of Stocks for the Long Run. Right now, he's cautious. "I'm pretty neutral," he told CNBC on Monday, adding: "Last December I said this market is going to struggle this year. I predicted zero to 10 percent and honestly I don't see any reason to change that prediction." Rising interest rates and a waning boost to profits from tax reform are his main reasons for caution. (For more, see also: Why the 1929 Stock Market Crash Could Happen in 2018.)
'Earnings Collide With Interest Rates'
"It's going to be a flat to slightly upward tilting year as good earnings collide with what I think will be higher interest rates both by the Fed and in the Treasury market," Siegel indicated to CNBC. He expects the yield on the 10-Year U.S. Treasury Note to reach 3.25%, up from 2.875% at the close on April 18.
While it is a small sample, CNBC notes that about 10% of the companies in the S&P 500 Index (SPX) reported first quarter earnings through the close on Monday, and 71% of them have beaten analysts' estimates. Reported EPS are up by 33% year-over-year (YOY), CNBC adds.
'Front-Loaded' Tax Cut
"This corporate tax cut is front-loaded," Siegel observed on CNBC, noting that the accelerated expensing of capital investments has a downside. As he elaborated: "Firms are actually going to lose depreciation deductions in future years. So, it's going to be great in 2018. 2019—you're going to have to have a growing economy to generate earnings gains. It's not going to be anywhere near as easy as it was this year."
That is, the acceleration of depreciation will create big one-shot YOY EPS increases, when comparing 2018 to 2017. Investors eager to see a repetition of such gains in 2019 are bound to be disappointed, Siegel warns. He noted that some analysts are projecting 10% earnings gains in 2019, but he indicated to CNBC that he expects something more like 5%. (For more, see also: 8 Threats to the Market in 2018.)
Meanwhile, the biggest U.S. banks are getting a collective $2.5 billion boost to first quarter earnings from tax reform, The Wall Street Journal reports. Wells Fargo & Co. (WFC) would have reported a YOY EPS decline otherwise, the Journal indicates.
'I Wouldn't Sell Out'
Siegel is not advising investors to dump stocks, however. As he also told CNBC: "I'm not predicting a bear market. Valuations are still very attractive for long-term investors. We're selling around 18 times this year's earnings. I wouldn't sell out here."
The forward P/E ratio on the S&P 500 has risen from about 13 times earnings in early 2013 to 16.6 as of April 17, per Yardeni Research Inc. The value of the index is up by 75.7% over the five years ending April 18. While Siegel believes otherwise, bearish observers see both facts as signs of dangerous froth in stock prices.
Interest Rates: No Problem
JPMorgan is somewhat more optimistic than Siegel regarding interest rates and their impact on the stock market. Per another CNBC story, they find that stock prices historically come under pressure only if the yield on the 2-Year U.S. Treasury Note exceeds 3.5%. As of the close on April 18, that yield was 2.431%. "Interest rates aren't anticipated to pose a problem for the economy or equity markets this year" is the conclusion of Mike Bell, global market strategist at JPMorgan Asset Management, in a note released on Tuesday, as quoted by CNBC.