The “surprise rally” that fueled stocks throughout 2017 is not over yet and is likely to push equity returns to double-digit levels again next year, according to one of Wall Street’s biggest bulls, Jonathan Golub. The equity market strategist with Credit Suisse believes that some of the same strong underlying economic fundamentals that pushed stocks higher in 2017 will continue, and that Republicans' massive corporate tax cut will keep the bull market rising throughout 2018, according to CNBC.
'Surprise Rally' Into 2018
Golub does not think stocks will post a 20% return, but he says that "double-digit" returns are very possible. His current price target for the end of next year for the S&P 500 is 2,875, which is about 7% above the closing price on Dec. 20 when CNBC’s article was published. Adding dividends to that could create a return of at least 10% for the year. (To read more, see: Stocks Could Rise As Much As 27% In 2018.)
As in 2017, the economic backdrop looks promising heading into the new year, according to Golub. The added bonus in 2018 will be the cut in the corporate tax rate from 35% to 21% coming from the Republican’s new tax bill. Golub believes that the economic benefits that will come from these tax changes will take hold in late 2018.
Wage Growth Headwinds
The major risk, which surprisingly did not materialize this year, is increasing wage growth. Usually when the economy exhibits stronger growth, wages also tend to pick up. Despite low unemployment rates, wages have remained subdued, keeping employment costs from cutting into companies’ profit margins. But if the economy continues to pick up, then wages are expected to follow suit, reinforcing the Fed’s reasoning for raising interest rates.
While higher interest rates could put a damper on new business investment, banks would be some of the main beneficiaries of the lower taxes since they currently pay among the highest corporate tax rates. Whereas tech stocks led the market rally last year, Golub thinks next year’s big winners will be in the financial sector. Utilities and retail stocks should also do well.
The strong market forces supporting Golub’s analysis include robust global economic growth. The U.S., Europe and China all enjoy strong growth for the first time in nearly a decade. Third-quarter U.S. GDP growth came in at a 3.3% annualized rate, surprising consensus forecasts of 2.5%. (To read more, see: 4 Reasons the Bull Market Has Only Begun.)
This economic expansion has continued in spite of the removal of QE stimulus and the Fed’s interest rate increases. Continued loose monetary policy in Europe and Japan should help to relieve some of the pressure that the Fed's tightening puts on the U.S. and global asset markets, allowing these economies to continue expanding for some time to come.