Weekly Performance
Dow +0.40% S&P +0.35% NAsdaq -0.11% Russell -1% EuroStoxx +1.81% FTSE +1.28% CAC +1.55% Dax +2.27% Ibex +2.34% SMI +0.48% Nikkei -0.03% Hang Seng -1.49% CSI +0.13% Shanghai -0.83% Shenzen -1.32% Mexico +0.36% BRazil +0.65%
US stock indices finally encountered some turbulence this week, though Monday did once again see another round of fresh highs. Rotational flows evident last week carried over early on, playing a significant role as high growth sectors, namely technology, experienced considerable relative selling. The high beta FANG names traded down 5% or more for the recent highs while the NASDAQ composite fell almost 3% from the top before buyers stepped in and shares recovered into week’s end. Some noted the parabolic rise in bitcoin, which at one point neared 19K, as potential culprit that could have been sucking oxygen away from equities. In Washington, Republicans pressed onward with efforts to reconcile the House and Senate tax bills and remain hopeful that legislation can reach the President’s desk by Christmas. Friday delivered the November employment report which offered little in way of surprises. The labor market continued to expand but the tightening slack remains slow to manifest in rising wages. Treasury yields drifted higher after the jobs report in a week that saw the benchmark spread narrow to 51 bps at one point. For the week the DJIA and S&P500 each added 0.4%, while the Nasdaq slipped 0.1%.
Macro :
- Italy Must Tackle ‘Crucial’ Issue of Bad Loans: Lagarde to Sole
Keep an eye on :
- ADP FP : France Is Said to Hire BofA to Study ADP Privatization: Figaro
- AMS SM : Amadeus Falls; Ryanair Says Ends Global Distribution Partnership
- AAPL US : Apple Is Said to Be Close to Buying Shazam: TechCrunch
- AAPL US : Apple’s Ive Retakes Management of Design Team After Two Years
- AV/ LN : David Cumming Is Said in Talks for Role at Aviva Investors: Sky
- BARC LN : Barclay Twins Are Said to Hire Oakvale for Ritz Club Sale: Times
- BA/ LN : BAE Agree GBP5B Contract to Supply 24 Typhoon Jets to Qatar (1)
- BAYN GY : Bayer Said to Face EU Objections to Monsanto Deal in Days
- BKG LN : Berkeley Is Seeking Approval to Construct Modular-Home Factory
- CBK GY : Deutsche, Commerzbank Want German Soccer Sponsorship: Spiegel
- COV1 GY : Covestro Join S&P Europe 350
- ACA FP : Credit Agricole’s Priority Is Organic Growth: CEO Tells Sole
- DIS US : Disney, Fox Are Said to Hire Bankers for Deal Talks: Variety
- DIS US : Disney May Scale Back Fox’s Movie Studio if Deal Reached: WSJ
- EI FP : Essilor-Luxottica to Hire New CEO After Merger, FT Says
- FMC GY : Fresenius Medical Plans Share Buyback for as Much as EU61m
- GATE SW : HNA Is Said to Eye Gategroup IPO in Early 2Q 2018: Reuters
- HSBA LN : HSBC Geneva Expects New Money Growth of About CHF3b: FuW
- LHN VX : Lafarge/Syria: 2 More Ex-Execs Formally Investigated, AFP Says
- MBTN SW : Meyer Burger Says About 160 Positions Affected by Restructuting
- MTU GY : MTU Aero Engines to Join S&P Europe 350
- NAS NO : Norwegian Air Still has ‘Massive’ Upside Potential, Kepler Says
- NOVN VX : Novartis Weighs Future of Contact Lens, Instrument Units: Blick
- NOVN VX : Gilead, Novartis Lymphoma Therapies Offer Some Benefit: Studies
- PEP US : PepsiCo to Move Stock Exchange Listing to NASDAQ From NYSE
- PFC LN : Petrofac Hired Bain & Co. to Explore Options: Sunday Times
- QIA GY : Qiagen Eyeing ‘Specific’ M&A Targets, CFO Tells Boersen-Zeitung
- QIA GY : Qiagen to Transfer U.S. Listing of Global Shrs to NYSE
- ROG VX : Roche’s Franz Sees ‘Challenge’ From Expiring Drug Patents: NZZ
- RYA LN : *RYANAIR TO END GLOBAL DISTRIBUTION PARTNERSHIP WITH AMADEUS
- SHP LN : Shire Names John Miller as Interim CFO
- GLE FP : Societe Generale to Stop Tar Sands, Arctic Oil Businesses
- STMN SW : Straumann to Join S&P Europe 350
- TKA GY : Thyssenkrupp to Offer Job Guarantees in Tata Deal, BamS Says
- VOW3 GY : Volkswagen CEO Calls for Diesel Subsidy Cuts: Handelsblatt (1)
- WTB LN : Whitbread CEO Says Units Not Yet Ready to Stand Alone: Times
Weekly Market Update: Brexit Talks Push Past Border Issue; Tech and Bitcoin Gyrations Distract TradersUS stock indices finally encountered some turbulence this week, though Monday did once again see another round of fresh highs. Rotational flows evident last week carried over early on, playing a significant role as high growth sectors, namely technology, experienced considerable relative selling. The high beta FANG names traded down 5% or more for the recent highs while the NASDAQ composite fell almost 3% from the top before buyers stepped in and shares recovered into week’s end. Some noted the parabolic rise in bitcoin, which at one point neared 19K, as potential culprit that could have been sucking oxygen away from equities. In Washington, Republicans pressed onward with efforts to reconcile the House and Senate tax bills and remain hopeful that legislation can reach the President’s desk by Christmas. Friday delivered the November employment report which offered little in way of surprises. The labor market continued to expand but the tightening slack remains slow to manifest in rising wages. Treasury yields drifted higher after the jobs report in a week that saw the benchmark spread narrow to 51 bps at one point. For the week the DJIA and S&P500 each added 0.4%, while the Nasdaq slipped 0.1%.Back and forth surrounding the ongoing Brexit negotiations played the dominate role in FX trading this week. Disagreements surrounding the Irish border issue spurred some speculation that Prime Minister May’s eroding support could result in a leadership changed as early as next year. Those fears were temporarily allayed by a late week breakthrough in the talks that appears to have the support of factions on both sides of the border going into the EU leaders’ summit next week. The Pound stayed in a downward trend though, as focus now shifts towards what could be even tougher talks in phase two of the Brexit process.In corporate news this week, reports indicated Disney is nearing a deal to acquire 21st Century Fox’s non-core assets, which could be accompanied by an agreement for Disney CEO Bob Iger to stay on past 2019 in order to facilitate a the integration of Fox divisions. CVS agreed on a $207/share asking price to acquire Aetna, valuing it at $77B, in a deal that would put a pharmacy, an insurer, and a PBM all under one roof. United Health's Optum unit announced it would acquire DaVita’s Medical Group division for $4.9B in cash, as DaVita pivots its focus to the kidney care sector. Lululemon shares are up 13% on the week after reporting a beat on its top and bottom line and boosting its outlook. GE announced it would cut 12K jobs from its power GE Division, mostly affecting professional and production workers based outside of the US, as the company struggles with a downturn in the gas and coal power markets. Teva is reportedly considering cutting 18% of its global workforce as it tries to pare $2B in expenses.SUNDAY 12/3AET Confirms to be acquired by CVS for $207/shr ($145/shr cash and 0.8378 in CVS shr) for ~$69BMONDAY 12/4(EU) EURO ZONE DEC SENTIX INVESTOR CONFIDENCE: 31.1 V 33.4E(EU) Portugal Fin Min Mario Centeno wins Eurogroup chairmanship race; term starts in Jan - press5401.JP To reduce orders accepted for steel pipes by 20-30% as production cannot keep up with the increase in demand from large-scale projects ahead of the 2020 Tokyo Olympics*(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET UNCHANGED AT 1.50%; AS EXPECTED (16th consecutive hold in the current easing cycle)Roark Capital reportedly raising $2B to acquire additional restaurant chains - AxiosTUESDAY 12/5(UK) NOV SERVICES PMI: 53.8 V 55.0E (16th month of expansion)(PL) POLAND CENTRAL BANK (NBP) LEAVES BASE RATE UNCHANGED AT 1.50%; AS EXPECTED(UK) DUP party leader Foster: Believes that DUP remains far away from a border agreement - financial press(US) OCT TRADE BALANCE: -$48.7B V -$47.5BE(US) Atlanta Fed cuts Q4 GDP estimate to 3.2% from 3.5% on 12/1(CN) US Commerce Dept to collect duties up to 265.79% on China origin steel imported from VietnamWEDNESDAY 12/6(IN) INDIA CENTRAL BANK (RBI) LEAVES REPURCHASE RATE UNCHANGED AT 6.00%; AS EXPECTEDFAST Reports Nov Rev $365.5M, +15.4% y/y(US) NOV ADP EMPLOYMENT CHANGE: +190K V +190KE(US) Q3 FINAL NONFARM PRODUCTIVITY: 3.0% V 3.3%E; UNIT LABOR COSTS: -0.2% V +0.2%E(CA) BANK OF CANADA (BOC) LEAVES INTEREST RATES UNCHANGED AT 1.00%; AS EXPECTED(US) Association of American Railroads weekly rail traffic report for week ending Dec 2nd: 572.8K carloads and intermodal units, +3.5% y/y(US) Sen Franken (D-MN) said to plan announcement tomorrow following resignation calls from nearly a dozen Democratic Senate colleagues - press(US) President Trump: recognizes Jerusalem as Israel's capital (as expected); believes it's in the best interests of the US and the pursuit of peace between Israelis and Palestinians(BR) BRAZIL CENTRAL BANK (BCB) CUTS SELIC RATE TARGET BY 50BPS TO 7.00%; AS EXPECTEDTHURSDAY 12/7(CN) CHINA NOV FOREIGN RESERVES: $3.119T V $3.124TE (10th straight month of increases)(EU) EURO ZONE Q3 FINAL GDP Q/Q: 0.6% V 0.6%E; Y/Y: 2.6% V 2.5%EGE GE Power division cuts 12K jobs (18% of of Workforce)(UK) Sticking point in Brexit talks on European Court of Justice is said to have been resolved - press(EU) ECB's Draghi: confirms Basel III is completed; it's a great day and a major milestone(US) Fed reports Q3 Financial Accounts: Household Change in Net Worth: $1.742T v $1.698T prior(US) Trump admin reportedly preparing infrastructure plan announcement in Jan - press(US) Senate passes stopgap spending measure that will keep the govt funded through Dec 22nd; vote 81 to 14(JP) JAPAN Q3 FINAL GDP Q/Q: 0.6% V 0.4%E; ANNUALIZED SA Q/Q: 2.5% V 1.5%E; NOMINAL Q/Q: 0.8% V 0.7%E(CN) CHINA NOV TRADE BALANCE (CNY-DENOMINATED): 263.6B V 240.8BE(CN) CHINA NOV TRADE BALANCE: $40.2B V $35.0BEFRIDAY 12/8(EU) EU Commission : Reaches breakthrough in Brexit negotiations; ready for second phase of negotiations(FR) FRANCE OCT INDUSTRIAL PRODUCTION M/M: +1.9% V -0.1%E; Y/Y: 5.5% V 2.9%E(UK) OCT INDUSTRIAL PRODUCTION M/M: 0.0% V 0.0%E; Y/Y: 3.6% V 3.5%E(US) NOV AVERAGE HOURLY EARNINGS M/M: 0.2% V 0.3%E; Y/Y: 2.5% V 2.7%E; AVERAGE WEEKLY HOURS: 34.5 V 34.4E(US) NOV CHANGE IN NONFARM PAYROLLS: +228K V +195KE(US) DEC PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 96.8 V 99.0EWFC Pres Trump tweets: "Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be droppe... but will be pursued and, if anything, substantially increased. I will cut Regs but make penalties severe when caught cheating!"(US) Atlanta Fed cuts Q4 GDP estimate to 2.9% from 3.2% on 12/5
Weekly Market Update: Brexit Talks Push Past Border Issue; Tech and Bitcoin Gyrations Distract Traders
US stock indices finally encountered some turbulence this week, though Monday did once again see another round of fresh highs. Rotational flows evident last week carried over early on, playing a significant role as high growth sectors, namely technology, experienced considerable relative selling. The high beta FANG names traded down 5% or more for the recent highs while the NASDAQ composite fell almost 3% from the top before buyers stepped in and shares recovered into week’s end. Some noted the parabolic rise in bitcoin, which at one point neared 19K, as potential culprit that could have been sucking oxygen away from equities. In Washington, Republicans pressed onward with efforts to reconcile the House and Senate tax bills and remain hopeful that legislation can reach the President’s desk by Christmas. Friday delivered the November employment report which offered little in way of surprises. The labor market continued to expand but the tightening slack remains slow to manifest in rising wages. Treasury yields drifted higher after the jobs report in a week that saw the benchmark spread narrow to 51 bps at one point. For the week the DJIA and S&P500 each added 0.4%, while the Nasdaq slipped 0.1%.
Back and forth surrounding the ongoing Brexit negotiations played the dominate role in FX trading this week. Disagreements surrounding the Irish border issue spurred some speculation that Prime Minister May’s eroding support could result in a leadership changed as early as next year. Those fears were temporarily allayed by a late week breakthrough in the talks that appears to have the support of factions on both sides of the border going into the EU leaders’ summit next week. The Pound stayed in a downward trend though, as focus now shifts towards what could be even tougher talks in phase two of the Brexit process.
In corporate news this week, reports indicated Disney is nearing a deal to acquire 21st Century Fox’s non-core assets, which could be accompanied by an agreement for Disney CEO Bob Iger to stay on past 2019 in order to facilitate a the integration of Fox divisions. CVS agreed on a $207/share asking price to acquire Aetna, valuing it at $77B, in a deal that would put a pharmacy, an insurer, and a PBM all under one roof. United Health's Optum unit announced it would acquire DaVita’s Medical Group division for $4.9B in cash, as DaVita pivots its focus to the kidney care sector. Lululemon shares are up 13% on the week after reporting a beat on its top and bottom line and boosting its outlook. GE announced it would cut 12K jobs from its power GE Division, mostly affecting professional and production workers based outside of the US, as the company struggles with a downturn in the gas and coal power markets. Teva is reportedly considering cutting 18% of its global workforce as it tries to pare $2B in expenses.
SUNDAY 12/3
AET Confirms to be acquired by CVS for $207/shr ($145/shr cash and 0.8378 in CVS shr) for ~$69B
MONDAY 12/4
(EU) EURO ZONE DEC SENTIX INVESTOR CONFIDENCE: 31.1 V 33.4E
(EU) Portugal Fin Min Mario Centeno wins Eurogroup chairmanship race; term starts in Jan - press
5401.JP To reduce orders accepted for steel pipes by 20-30% as production cannot keep up with the increase in demand from large-scale projects ahead of the 2020 Tokyo Olympics
*(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET UNCHANGED AT 1.50%; AS EXPECTED (16th consecutive hold in the current easing cycle)
Roark Capital reportedly raising $2B to acquire additional restaurant chains - Axios
TUESDAY 12/5
(UK) NOV SERVICES PMI: 53.8 V 55.0E (16th month of expansion)
(PL) POLAND CENTRAL BANK (NBP) LEAVES BASE RATE UNCHANGED AT 1.50%; AS EXPECTED
(UK) DUP party leader Foster: Believes that DUP remains far away from a border agreement - financial press
(US) OCT TRADE BALANCE: -$48.7B V -$47.5BE
(US) Atlanta Fed cuts Q4 GDP estimate to 3.2% from 3.5% on 12/1
(CN) US Commerce Dept to collect duties up to 265.79% on China origin steel imported from Vietnam
WEDNESDAY 12/6
(IN) INDIA CENTRAL BANK (RBI) LEAVES REPURCHASE RATE UNCHANGED AT 6.00%; AS EXPECTED
FAST Reports Nov Rev $365.5M, +15.4% y/y
(US) NOV ADP EMPLOYMENT CHANGE: +190K V +190KE
(US) Q3 FINAL NONFARM PRODUCTIVITY: 3.0% V 3.3%E; UNIT LABOR COSTS: -0.2% V +0.2%E
(CA) BANK OF CANADA (BOC) LEAVES INTEREST RATES UNCHANGED AT 1.00%; AS EXPECTED
(US) Association of American Railroads weekly rail traffic report for week ending Dec 2nd: 572.8K carloads and intermodal units, +3.5% y/y
(US) Sen Franken (D-MN) said to plan announcement tomorrow following resignation calls from nearly a dozen Democratic Senate colleagues - press
(US) President Trump: recognizes Jerusalem as Israel's capital (as expected); believes it's in the best interests of the US and the pursuit of peace between Israelis and Palestinians
(BR) BRAZIL CENTRAL BANK (BCB) CUTS SELIC RATE TARGET BY 50BPS TO 7.00%; AS EXPECTED
THURSDAY 12/7
(CN) CHINA NOV FOREIGN RESERVES: $3.119T V $3.124TE (10th straight month of increases)
(EU) EURO ZONE Q3 FINAL GDP Q/Q: 0.6% V 0.6%E; Y/Y: 2.6% V 2.5%E
GE GE Power division cuts 12K jobs (18% of of Workforce)
(UK) Sticking point in Brexit talks on European Court of Justice is said to have been resolved - press
(EU) ECB's Draghi: confirms Basel III is completed; it's a great day and a major milestone
(US) Fed reports Q3 Financial Accounts: Household Change in Net Worth: $1.742T v $1.698T prior
(US) Trump admin reportedly preparing infrastructure plan announcement in Jan - press
(US) Senate passes stopgap spending measure that will keep the govt funded through Dec 22nd; vote 81 to 14
(JP) JAPAN Q3 FINAL GDP Q/Q: 0.6% V 0.4%E; ANNUALIZED SA Q/Q: 2.5% V 1.5%E; NOMINAL Q/Q: 0.8% V 0.7%E
(CN) CHINA NOV TRADE BALANCE (CNY-DENOMINATED): 263.6B V 240.8BE
(CN) CHINA NOV TRADE BALANCE: $40.2B V $35.0BE
FRIDAY 12/8
(EU) EU Commission : Reaches breakthrough in Brexit negotiations; ready for second phase of negotiations
(FR) FRANCE OCT INDUSTRIAL PRODUCTION M/M: +1.9% V -0.1%E; Y/Y: 5.5% V 2.9%E
(UK) OCT INDUSTRIAL PRODUCTION M/M: 0.0% V 0.0%E; Y/Y: 3.6% V 3.5%E
(US) NOV AVERAGE HOURLY EARNINGS M/M: 0.2% V 0.3%E; Y/Y: 2.5% V 2.7%E; AVERAGE WEEKLY HOURS: 34.5 V 34.4E
(US) NOV CHANGE IN NONFARM PAYROLLS: +228K V +195KE
(US) DEC PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 96.8 V 99.0E
WFC Pres Trump tweets: "Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be droppe... but will be pursued and, if anything, substantially increased. I will cut Regs but make penalties severe when caught cheating!"
(US) Atlanta Fed cuts Q4 GDP estimate to 2.9% from 3.2% on 12/5
2 Transportation Stocks for a Recovering Europe
Germany’s Deutsche Post and France’s Vinci combine defensive businesses with units that look ready for steady growth.
Many strategists are making Europe sound great again as they dish out their 2018 picks.
It helps that valuations for the region’s stocks still aren’t that stretched. In fact, the Organization for Economic Cooperation and Development expects the euro zone’s gross domestic product to grow by 2.1% next year, down from this year’s 2.4% rise.
As Russell Investments strategists write in a note, “Reflation, combined with the refutation of populist movements in the region, have laid the foundation for a self-sustaining recovery that could last for years to come.” The bulls from Russell describe valuations for Europe’s stocks as “neutral” and fundamentals as “strong,” adding that they “continue to favor euro-zone financial markets over U.S. markets in particular.”
Is there a European sector that might make for a particularly good bet in 2018? Transportation stocks are worth considering. The MSCI index that tracks shares of toll-road operators, shipping companies, airlines, and other transportation outfits has outperformed the broad market this year, with an advance that has topped 31%, note Deutsche Bank analysts. They expect more gains in 2018, thanks to another pickup in volume for these businesses.
“THE MACROECONOMIC OUTLOOK looks robust in 2018 with our DB economists forecasting real global GDP growth of 3.8%,” write the bank’s Andy Chu and his colleagues in a note. “Volume growth across the sector is typically a multiplier of one to 1.5 times GDP, which suggests that market-volume growth should be around mid-single digits.” The bank’s top picks in the sector include Deutsche Post(ticker: DPW.Germany), which runs global shipping heavyweight DHL and Germany’s postal service, and Vinci (DG.France), with toll-road and construction units. The former is a GARP stock, that is, one that delivers growth at a reasonable price, say the analysts.
“We think that the company can deliver mid-single-digit organic revenue growth medium term, supported by structural e-commerce growth,” they write. Deutsche Post is “cheap,” with a dividend yield around 3%; they have a Buy rating on it and a price target of 45 euros ($53), about 13% above the recent €40. The stock, which is up 28% this year, trades around 16 times forward-year earnings, below FedEx’s(FDX) multiple of 17 and United Parcel Service’s (UPS) 18.
Deutsche Post’s valuation is “stuck in the past and not where it should be,” assert the analysts, who have an Outperform rating on the shares and a price target of €44. They add that 64% of revenue will come from DHL and other nonpostal units by 2025, and that the fading effect of more-traditional businesses argues for a higher multiple.
An attractive feature of Vinci is that the stock looks like half a growth play, half a steady Eddie. About 50% of its value is “underpinned by very resilient and predictable mature toll roads in France,” the DB analysts say. The company is also a bet on growth, thanks to its construction unit’s “more cyclical contracting activities,” they add, giving the shares a Buy rating and price target of €94. That target implies a modest rally of about 7%.
Raymond James analysts see bigger upside. They say that Vinci ought to build on this year’s gain of about 36% because its share price doesn’t yet reflect its “unique mix of defensive qualities; good growth potential; and notably, its capacity to create value through acquisitions.” They rate the stock Outperform, with a €100 price target.
Deutsche Bank’s two other top picks in transportation are International Consolidated Airlines Group(IAG.UK) and rival Deutsche Lufthansa (LHA.Germany), both of which have landed bullish mentions in this column this year (“British Airways’ Meltdown: Time to Buy IAG?” June 2, and “Deutsche Lufthansa Has More Room to Climb,” Oct. 21).
It’s not all rosy. Deutsche Bank suggests one stock to sell. Royal Mail’s (RMG.UK) management is performing well in the early phases of a modernization effort, they say, but the postal and delivery company nonetheless faces a difficult year. Chu and his colleagues put a price target of 359 pence ($4.79) on the shares, implying a drop of about 16%, which would add to this year’s fall of 7%.
“We think it will be more difficult for Royal Mail to modernize and take costs out of the business in an environment where GDP growth is weak,” they say, referring to a United Kingdom economy that the OECD expects to expand by just 1.2% next year. Other challenges include uncertainty over business confidence as Brexit talks continue, as well as ongoing mediation with unions over pay and pensions. Royal Mail’s leaders are “doing a fine job,” but “postal and parcels network businesses are highly complex and take many years to reconfigure and fully modernize,” they conclude.
IN EUROPEAN MARKETS last week, the main equity benchmarks gained ground, adding to their year-to-date advances. Much of the move higher came on Monday, with analysts attributing it, in part, to cheer over the U.S. Senate passing its tax-overhaul bill.
Outlook 2018: The Bull Market’s Next Act
Wall Street’s eight-year love affair with stocks kicked into overdrive this year, spurred by a stronger economy, the likelihood of tax cuts, and a lack of compelling investment alternatives.
Donald Trump’s election as president in 2016 turned a bull with a midlife crisis into a high-powered charger, as investors cheered the Republicans’ pro-growth agenda and bid up anything that might benefit. Stocks have produced an 18% price gain, and a 21% total return year to date, as measured by the Standard & Poor’s 500 index, with low volatility and nary a trading session in which the popular benchmark closed down for the year. As for the market’s last big selloff—a 15% decline in February 2016—it seems a distant memory. On Friday, the S&P 500 index ended at 2651.50.
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Given synchronized global growth and rising corporate profits, 2018 could be another good year for stocks, notwithstanding the bull’s advancing age. The S&P 500 could gain about 7%, mirroring similar gains in corporate profits, according to the consensus forecast of 10 investment strategists at major U.S. investment banks and money-management firms surveyed by Barron’s each December. The group’s predictions range from 2675 to 3100, with a mean estimate of about 2840.
The outlook isn’t entirely rosy: Interest rates are headed higher, stocks are expensive, and a tax overhaul could still stall or fail. But so long as corporate earnings keep climbing and the Federal Reserve raises rates in a measured way, the strategists see more room for gains.
“Rational exuberance is the stock market’s theme for 2018,” says David Kostin, Goldman Sachs’ chief U.S. equity strategist, harking back to the well-known but ill-timed “irrational exuberance” comment made by Federal Reserve Chairman Alan Greenspan in late 1996 about the rollicking bull market of that era. The market doubled after Greenspan’s veiled critique, only to lose about 50% from its top in the 2000 dot-com bust.
A rapidly expanding price/earnings ratio, or market multiple, drove the 1990s bull, but “it’s the earnings this time,” says Kostin, whose view is shared by his peers.
OUR PROGNOSTICATORS EXPECT S&P 500 earnings to climb to $145 in 2018 from an expected $131.45 this year. Most estimates assume that global growth will spur earnings gains, with an additional boost coming from U.S. tax cuts. Depending on the final tax bill, they figure that lower corporate taxes could be worth 5% to 10% of earnings growth, or anywhere from $7 to $14 a share. But in the unlikely event that no tax cuts are passed, the market could drop sharply.
Industry analysts forecast S&P earnings of $146.20 for next year, not including tax cuts. If analysts revise their estimates higher in coming months to account for the positive impact of lower taxes, stocks could get a further boost.
Market strategists are divided on whether stocks’ P/E ratios will expand. The S&P 500 trades for 18 times the next four quarters’ expected earnings, up from 17.1 times 12 months ago. While the most bullish forecasters look for P/E multiple expansion to help propel stock indexes, others worry that 2018 could be a “peak” year for P/Es.
The strategist got a few important things right last December in looking ahead to 2017. They predicted that stocks would rise this year, speculative activity would revive, and financial stocks would do well again after gaining 20% last year. Indeed, financials are up 20% this year. The strategists were too timid, however, in their market forecasts; their mean prediction put the S&P 500 at 2380 at the end of the year. That now seems highly unlikely, barring a sudden last-minute rout.
Financials, once again, are Wall Street’s favorite stocks for the new year. The industry should be helped by higher interest rates, lower taxes, and an economy growing by nearly 3% a year. The sector trades for about 15 times next year’s expected earnings, below the market multiple, and banks are some of the nation’s highest corporate tax payers.
Consumer staples, real estate, and utility stocks, on the other hand, are expected to underperform in 2018, due to rising interest rates. Because of their relatively lush dividend yields, all are considered bond proxies. The stocks are this year’s laggards: Utilities are up 14%; staples, 10%; and real estate investment trusts, 7%.
TECH STOCKS LED the market for most of this year with a gain of 35%, helped by an even more powerful rally in the so-called FANGs: Facebook (ticker: FB), Amazon.com (AMZN), Netflix (NFLX), and Google, owned by Alphabet (GOOGL). Market watchers now are neutral to positive on the foursome and the sector. At 17.7 times next year’s estimated earnings, tech valuations aren’t cheap, but they’re well below valuations in the dot-com era, and underlying earnings growth is strong.
Investors worry that next year might see a move toward greater regulation of large tech names, which, some strategists fear, could play havoc with their shares and the market. Despite its Republican pedigree, the Trump administration seems unafraid to pursue antitrust actions against giant corporations, as AT&T (T) can attest; the Department of Justice has sued to block its $85 billion takeover of Time Warner (TWX). Social-media giants such as Facebook and Google have been caught in the crosshairs of congressional investigations into possible Russian involvement in last year’s election, while some critics decry the allegedly monopolistic tendencies of Amazon.
Led by Bitcoin, up 1,500% this year, to $15,232, cryptocurrencies are likely to stay in the spotlight in 2018, gaining even more investor attention. Some market strategists—and plenty of other people—worry that the virtual coins are merely a fad, however, whose trajectory will end in tears and rattle other assets, including stocks.
With interest rates still near historic lows almost a decade after the financial crisis of 2008-09, stocks have had plenty of runway for growth. Most strategists expect rates to rise in the next year, but not to levels that would imperil the bull. Our panel looks for the Federal Reserve to lift its federal-funds rate target on Wednesday by 0.25 of a percentage point, to a range of 1.25% to 1.5%, and follow up with three rate hikes next year that would take the federal-funds rate, on which other interest rates are based, to a range of 2% to 2.25%.
Jerome Powell, successor to Fed Chair Janet Yellen, is expected to continue her easy monetary policy, but could be inclined toward less regulation. That is another reason why financials are favored in 2018.
ED YARDENI, PRESIDENT of Yardeni Research, is no stranger to Wall Street but a newcomer to our panel—and its most exuberant bull. He sees the S&P 500 ending next year at 3100, which would reflect a gain of about 17% from current levels. Just don’t give all the credit to tax relief, he says; a second year of global economic growth could ignite fresh enthusiasm for stocks. Corporate earnings growth remains a relative novelty for investors. In the three years prior to 2017, S&P 500 profits were flat at about $118.
John Praveen, chief investment strategist at PGIM Global Partners, has a 2018 year-end target of 2925. His 2017 forecast was closest to the mark, at 2575. A longtime bull, Praveen cites falling cash levels at money-management firms as a sign that institutional investors are finally embracing the rally.
While the Street’s seers believe the market has already discounted about half of the expected tax relief, the tax bill, if passed, could be a gift that keeps on giving. Dubravko Lakos-Bujas, JPMorgan’s chief U.S. equity strategist, says the impact on corporate earnings “will resonate in the first and second quarters of 2018…and continue to be a positive tailwind [for stocks] into the first half of 2018.”
With the S&P trading well above its historical average of 15 times earnings, “it is accepted wisdom that the market is expensive,” says Stephen Auth, chief investment officer for equities at Federated Global Investment Management. But he argues that’s not the case, given the economic and interest-rate backdrop, a pro-business administration, and unattractive fixed-income alternatives.
Auth has a year-end target of 3000, derived by applying a P/E of 20 to his 2018 earnings estimate of $150. For all the talk of investor exuberance, he says, “we haven’t gotten to the point where taxi drivers are giving stock tips.” JPMorgan Chase (JPM) is one of his favorite stocks; the bank could earn $10 a share next year and deserves to trade at 15 times earnings, he says. That implies a stock price of $150, compared with Friday’s $106.
WHILE ALL OUR STRATEGISTS expect stocks to head higher in 2018, some see a yellow light, not a green one, suggesting that the bull’s days are numbered. Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, anticipates a “below-average year,” with the S&P 500 up about 4%, to 2750, compared with a roughly 13% annual gain since 2012. Although earnings will rise next year, he says, this is a “late-cycle environment for the American economy and equity markets.”
The market’s price/earnings multiple could contract later in 2018 as earnings growth peaks and investors sniff out potentially lower growth in 2019, he adds.
Rob Sharps, chief investment officer of T. Rowe Price’s equity group, and another newcomer to our group, agrees. He expects market leadership to narrow in 2018, which is typical in the later stages of a bull market. Sharps calls the current environment “about as good as it gets” for financial assets, with investors buying every pullback. “You have elevated asset prices, high expectations, and aggressive positioning for ‘risk on,’ ” he says.
Unemployment has been around 4% for a while, he notes, adding that when the labor market is at full employment, the economic expansion typically is 60% to 65% complete. That suggests a recession could start in late 2019 or 2020, which investors would anticipate next year. Sharps likes Signature Bank(SBNY), a high-quality bank whose shares have dropped 16% from its peak, to $137, as the bank has had to pay more for deposits. He expects these headwinds to recede, and thinks the New York banking company could become an acquisition target.
Tobias Levkovich, chief U.S. equity strategy at Citigroup’s Citi Research, argues that investors shouldn’t look to tax cuts to keep the market roaring. They are a “one-shot deal” in boosting year-to-year earnings comparisons, and might not even be permanent. “The Street doesn’t believe that the Democrats could take the House of Representatives in 2018, but they could,” he says.
Levkovich, one of the least bullish strategists, has a year-end 2018 target of 2675 for the S&P 500. Should investors accord the same multiple to tax earnings as to operating profits? “I don’t think so,” he says.
Moreover, any gain from a tax cut could be diluted in part through research, development, and capital spending, says Savita Subramanian, head of equity and quantitative strategy at Bank of America Merrill Lynch. It isn’t clear how much corporations will get to keep and return to shareholders directly, she says. The strategist, who has a 2018 year-end target of 2800, sees positive sentiment and momentum driving stocks higher in what she calls a potential “year of euphoria.” She favors the materials sector, noting it tends to perform well in the later stages of a bull market, and likes DowDuPont (DWDP), the global chemical company.
SOME INVESTORS EXPECT a reduced tax on companies’ overseas earnings to produce a cash windfall at home. But Goldman’s Kostin warns that might not be the case. He estimates that U.S. companies have $2.5 trillion in untaxed earnings overseas, of which $922 billion is in cash. About 85% of that cash belongs to only 20 companies, chiefly in the tech and health-care sectors. Kostin, with a 2018 S&P target of 2850, favors the industrials sector, which will benefit from solid capital-spending trends and global growth. Deere (DE), in particular, is investing for growth, he notes.
While Federated’s Auth expects the FANGs to take a breather, especially with stronger growth in gross domestic product and lower taxes lifting other boats, he considers the stocks to be big growth compounders longer term. He looks for Facebook and Alphabet to get an additional lift from higher profits by the middle of 2018.
For another view, there’s JPMorgan’s Lakos-Bujas. He downgraded tech to Underweight last Monday; the sector is flat since then. He bases his negative assessment primarily on “tactical” factors—namely, a conviction that value stocks are set to outperform growth stocks, the bucket in which tech stocks fall.
The spread between value and growth has reached a point historically associated with a reversal; the Russell 1000 value index is up 9% this year, against a gain of 27% in the comparable growth index. Tax reform is a catalyst for a rotation into value stocks, as value companies generate almost 80% of their revenue in the U.S. and are subject to an effective tax rate of 30.3%, the strategist observes.
Market strategists expect U.S. stocks to outperform bonds again in 2018, especially with interest rates rising. The Bloomberg Barclays U.S. Aggregate Bond index is up only 3% this year, and 10-year Treasury yields have fallen to 2.38% from 2.45%, although they have rebounded from a low of 2.04% earlier in the year. (Bond prices move inversely to yields.) The strategists’ 2018 year-end consensus forecast for the 10-year Treasury yield is 2.8%. “It’s hard to like bonds,” says Yardeni, summing up the prevailing view.
Merrill’s Subramanian worries that yield-hungry institutional investors are “aggressively positioned and over-own” REITs and utilities, which yield more than government bonds. Compounding the problem, utilities tend to carry high debt loads, she notes. “They look like a bond, trade like a bond—and bonds aren’t where you want to be,” she says.
Globally, most market watchers say U.S. stocks are the place to be in 2018 because of earnings expectations. But fans of overseas markets note that many are earlier in the earnings-recovery cycle. Jeffrey Knight, co-head of global asset allocation at Columbia Threadneedle Investments, notes that U.S. equities rank poorly on various valuation metrics when compared with international stocks, which suggests that the rest of the world will catch up. That said, European, Asian, and emerging market stocks are outperforming the U.S. in dollar terms this year. The Stoxx Europe 600 index has returned 23%; Japan’s Nikkei average, also 23%; and the MSCI Emerging Markets index, 31%.
Knight, who has an S&P forecast of 2750, favors equity markets in developing economies, Australia, Hong Kong, and Japan.
IF MUCH IS LINED UP to go right in 2018, a few things could go spectacularly wrong. A recurrence of inflation is one thing many market watchers fear. While it has been quiescent for years—the consumer price index hasn’t met the Fed’s 2% target—stronger economic growth could ignite it. If core inflation, excluding food and energy prices, were to top 3%, it would be a problem for markets, says Federated’s Auth.
The strategists all fear that the Fed could raise interest rates too aggressively, which would take away the market’s punch bowl. There could also be a negative impact on the consumer and the economy. “I worry about the cumulative impact of rising rates on Americans,” says Citi’s Levkovich. “There are people who have financed their lives on low rates for nearly a decade.”
A regulatory attack against social-media companies, or even the hint of one, could also hit the market hard. Earlier this year, as T. Rowe Price’s Sharps notes, the president tweeted negative comments about Amazon, and executives from Facebook and Google were called before Congress to testify about how foreign nationals might have used the social-media platforms to interfere in U.S. elections. A negative policy response to the sector “could knock the legs out of the U.S. market and the rest of the world,” Sharps says.
Then there’s the parabolic rise of Bitcoin and cryptocurrencies generally—and concerns that a fear of missing out also could lead investors to chase stocks with similar desperation. Alternately, a Bitcoin crash could curdle investor enthusiasm for all risk assets.
But investors aren’t worried yet.
So long as earnings are rising, rates are low, volatility is subdued, and every stock selloff is met with more buying, as happened again this past week, the bull will still rule over Wall Street.