As 2017 comes to an end, we like to take a look back at the projections for the S&P 500 index that top Wall St. strategist made for the year and what they are expecting for 2018. Returns in the S&P 500 were propelled by optimism of corporate tax reform and a strong earnings season finishing the year with a 20.49% gain. The average projection among strategist for 2017 was a 4.12% gain in the S&P 500. The chart below contains their 2018 projections for the index, as well as their 2017 estimates. As a group, the average for 2018 is a 7.51% gain in the S&P 500. Analysts point to continued earnings growth, positive impacts of corporate tax reform and a strong global economy as a reason to remain bullish moving forward. Comments from each of the strategists can be found beneath the chart below.
*As of 12/19/17
Goldman Sachs, 2850
“The current equity market valuation is certainly stretched in historical terms but it does not appear unreasonable based on the high level of corporate profitability. The return on equity (ROE) of the S&P 500 equals 15.4%, which typically corresponds with a price/book multiple of roughly 3x. The index currently trades at a modest premium of 3.3x. Looking ahead we forecast ROE will expand to 17.5% in 2018, supporting an increase in valuation from the current level”.
“We suspect that investors may not be willing to accord the same P/E for earnings generated by a lower tax rate versus one for underlying operating performance. Nonetheless, even if we assumed half the market multiple on the incremental tax-related EPS gains, it will still be additive to the S&P 500’s upside potential.”
Deutsche Bank, 2850
“The uptrend in global stocks is set to enter its tenth year in March 2018. “Market participants could demand a higher risk premium on account of the already longstanding cycle,” said Chadha. Nevertheless, the outlook is interesting due to the strong global economy: “We believe that prices could continue to rise, possibly even beyond 2018”
“We think our upside case, based on Congress delivering a tax cut, is more likely than our downside scenario and upside potential (S&P 500 at 3,300) outweighs the downside case by 2x,” Parker said. “As the Fed continues to hike, equity valuations are seemingly pricing in higher rates, but not pricing higher expected medium-term profit growth or lower fundamental earnings volatility.”
Credit Suisse, 2987
“P/Es have historically moved higher until the 10-year Treasury reaches 5%. However, the research presented in this note shows that this tipping point has likely fallen to 3 1⁄2%, in response to the current slower-growth environment. With Treasury yields below 2 1⁄2% today, this implies that stock valuations will not be challenged by rising rates for quite some time.”
Canaccord Genuity, 2800
“We have remained focused on our 2018 S&P 500 (SPX) target of 2,800 and deemphasized the close proximity to our 2,510 target because (1) our positive core thesis remains firmly in place; (2) the many macro headwinds have become tailwinds; (3) over the past two cycles the equity market has seen significant gains as the yield curve approached inversion; and (4) since 1956, SPX gains of >12% in the first three quarters suggest a possible 4.6% median gain in Q4 2017”.
Societe Generale, 2500
Robust earnings, subdued inflation, synchronized global growth and central banks looking to tighten monetary policy have all underpinned equities in 2017. However, the next calendar year does not likely to follow the same pattern, SocGen analysts said Thursday. “We expect stretched valuations and rising bond yields to limit equity index performances in 2018 and the prospect of a U.S. economic slowdown in 2020 to further cramp returns in 2019.
Morgan Stanley, 2750
“Earnings will continue to drive stock prices, but the economy will also play a role as it extends into its 10th year of recovery, Mike Wilson said. He noted that some of the best equity returns come late during the economic cycle — like now — but said it was time to start thinking about what happens when the tide turns”.
Piper Jaffray, 2850
“We see a favorable backdrop for U.S. equities as market fundamentals suggest the path of least resistance remains higher,” strategists Craig Johnson and Adam Turnquist said. “We believe the growth story will continue to drive price action and cut through the day-to-day noise.”
“We believe there is no reason to expect that a dramatic reversal in longer-term fundamentals is imminent,” Belski said. “Rather, the slope of our long standing secular bull market call remains positive.”
JP Morgan, 2700
“In our view, the macro backdrop remains supportive for earnings growth (y/y) with lower U.S. Dollar, a goldilocks scenario for Financials with expanding net interest margin and multi-decade low credit costs, and rising commodity prices,” Lakos-Bujas explained. “Looking ahead, we see S&P 500 2018 consensus EPS upside.”
Bank of America, 2800
“We think euphoria is what’s going to end this bull market and we’re not there yet,” Subramanian said. “We’re not at the point where the investment community is saturated in equities and there’s nothing to do with stocks but sell.”
RBC Capital, 2625
“The S&P 500 has benefited from rising earnings and price-to-earnings ratios through this bull market, but earnings rather than valuations may now be the force required to propel the market higher”.
“Skeptic and bear capitulation appears to have just begun in the fourth quarter of 2017 and contributed to the number of this year’s equity benchmark record highs,” said Stoltzfus. “We believe that it is early in this process and multiples could expand further than we currently anticipate should the capitulation gain momentum.”
“We find relative valuations of US and Europe just slightly ahead of averages. And with tax reform boosting earnings for US companies, we think the US is cheaper. We found a modest preference by our analysts of US stocks”.
“We see the economic and earnings backdrop as positive for equities, with fuller valuations a potential drag, especially in the U.S. Corporate tax cuts would boost U.S. earnings, with different effects across sectors and companies”.
Thanks to our intern, Alex LaRosa for his contributions to this article!