Barron’s Magazine last weekend published its big story on the 2017 stock market outlook.
Once again, all the analysts were in agreement that “this bull market has legs,” as the headline of the article by Vito Racanelli said. That sentiment usually gets market bears excited, since Barron’s cover is used as an unscientific contrarian indicator; basically, believe the opposite of whatever the magazine reports as consensus.
Analysts turned bearish for the first time in several years in a September story on their year-end outlook. They lowered their expectation for the S&P 500, citing election uncertainty and the high valuation reflected in the price/earnings ratio.
However, their outlook at this time last year was accurate. Their average year-end forecast for the benchmark S&P 500 — which was bullish at the time — was 2220. The index closed at 2,258.07 on Friday December 16.
President-elect Donald Trump’s win and the prospects of corporate tax cuts and other reforms have turned sentiment around on Wall Street. The big risk of a market correction in 2017 is if Republicans don’t make progress on their proposals by the middle of the year, especially on tax cuts, Barron’s reported.
The strategists estimate S&P 500 earnings growth by 7% to $127 next year. Many had not factored in the impact of Trump’s proposals in that forecast.
They will continue to watch how the Federal Reserve responds to changes in the economy. The Fed last week raised its longer-term expectation for interest rates for the first time since it started publishing the projection in 2012. Higher rates should help the financial sector, the favourite for 2017 among strategists surveyed by Barron’s.
It seems everyone and their cousin is bullish right now. Yet, there are grumbles that the post-election rally may be overdone, especially in stocks that would benefit from higher infrastructure spending. That’s partly because the Republican party is usually wary of spiking the government deficit, so there’s a big question mark on the extent to which that would be allowed to happen.
And as we highlighted over the weekend, recent options-market activity shows that few in the market are hedging for the downside. Even if Barron’s contrarian indicator won’t do it, some strategists are worried for other reasons.