What's traditionally the most important driver of the stock market will retake its place in the new year, according to Jeffrey Saut, the chief investment strategist at Raymond James.
Corporate earnings growth in the US has slowed for months, while the bull market continued and stocks rose to all-time highs with a few pauses here and there.
The whole time, it was an interest rate-driven bull market, Saut said in a note to clients on Monday. Low interest rates reduced debt expenses, making it easier for companies and consumers alike to access leverage.
However, profits are set to become the primary focus of markets again in 2017: interest rates have bottomed, Saut said, and tax cuts under the new administration could bring substantive earnings growth.
Saut wrote (emphasis added):
"To be sure, yearend letters are always hard to write because there is a tendency to discuss the year gone by, or worse to predict what is in store for the new year. Quite frankly, how many pundits predicted Brexit, or a Donald Trump victory? Certainly it wasn’t Andrew Adams or I. Yet, we think by far the biggest message as we prepare to enter 2017 is that the equity markets are transitioning from an interest rate driven bull market to an earnings driven bull market."
The S&P 500 recorded 3.1% earnings growth in the third quarter according to FactSet, ending a five-quarter streak of declines. Earnings are estimated to grow by 3.2% in the fourth quarter and could mark the first back-to-back period of gains in two years.
None of that would reflect the impact of tax cuts; a 1% drop in the corporate tax rate theoretically adds $1.31 to S&P 500 earnings, according to Reuters.
Saut reckons that getting the corporate tax rate to 15% "could prove to be difficult." "Still, a 25% tax rate would produce an earnings estimate for 2017 of ~$144," he wrote.
"Again holding the price/earnings ratio constant at 17x gives us a price target for the S&P 500 of roughly 2450 in the new year [$144 x 17 = 2448]. In either event, we believe stocks are going to trade substantially higher over the next few years. Will there be pullbacks? You bet there will, but in our view pullbacks are for buying."
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.