2017 has been a spectacular year for U.S. equities. Year-to-date (YTD) the S&P 500 is up 18.6 percent and the Dow Jones is up 24.25 percent, with both trading around record highs. 2017 was also a great year for the U.S. economy as it is forecasted to expand by 2.2 percent.
With 2017 coming to an end, the U.S. economy is heading into 2018 with strong momentum that is likely to put upward pressure on both wage growth and inflation. In 2017, both business investment and earnings growth experienced significant gains. For 2018, earnings growth estimates have generally been revised higher in response to progress on the U.S. tax overhaul, higher GDP growth, and higher commodity prices. The U.S. labor market also showed resilience in 2017 (unemployment is still low and jobs are increasing). Additionally consumer spending, which has been a bright spot in the U.S. economy is expected to increase in 2018.
Against this economic backdrop, it is likely that the Fed will hike interest rates at least three times next year – which is in-line with Yellen’s views. However, the Fed will be shifting hands to Governor Jerome Powell in 2018, leaving a little bit of uncertainty on the pace of rate hikes – although Powell is likely to follow the precedent that Yellen has set forth. Overall, the U.S. economy is forecasted to expand 2.5 percent in 2018, up 0.3 percent from 2017.
In terms of the world economy, it should continue to stabilize as the steady continuation of growth across global economies remains evident. Based on consensus, global GDP growth is forecasted to be 3.7 percent in 2018, up 3.5 percent from 2017. Currently, the world’s three largest economies are all anticipated to fare well in 2018 with no hard landings (the U.S., China, and Japan).
Even though China has been posting solid economic data recently, the world’s second largest economy is expected to experience a moderate slow down in 2018. This is in response to the PBOC’s quicker-than-expected deleveraging initiatives.and a peak in labor supply (which is set to decline). Overall, the Chinese economy is forecasted to expand by 6.8 percent in 2017, with growth slowing to 6.4 percent in 2018.
Japan, the world’s third largest economy has been doing unusually well. Solid economic data on industrial production, exports, retail sales, and business investment have shown that the Japanese economy is accelerating to a more robust rate of expansion. For 2018, we should expect Japan’s recovery to continue.
Based on these emerging global trends and the strengthening of U.S. economic performance, we should expect U.S. equities to perform well in 2018. In-line with this view, Goldman Sachs recently released research report that predicts the S&P 500 will reach 2,850 in 2018.