Investors aren't bullish enough on US stocks for 2018

Over the last few days, I've been listening to Wall Street firms talk about their expectations for the year ahead. Almost all of them have a positive view but it is the same standard presentation over and over. Most of them conclude that they prefer international stocks over US stocks because of valuation. While Europe is certainly trading at a lower multiple than the US, their growth is also expected to slow in 2018. Also note that European markets significantly underperformed US markets in the 2nd half of last year.

For Runnymede, we are certainly intrigued by the long-term opportunities in emerging markets because they have better fundamentals and lower valuations. In terms of the developed markets, we believe that investors aren't bullish enough on US markets. As I wrote a couple of weeks ago, Wall Street strategists have a target of 2848 for the S&P which I believe will be too conservative especially if interest rates stay low. Here are a couple of reasons why investors aren't bullish enough.

Note: We will be hosting our quarterly investment outlook webinar on Tuesday the 9th at 2:30 for our clients. We will discuss the markets and take Q&A. If you have interest in tuning in live or to the replay, email us at firm@runnymede.com.

Earnings expectations heading higher

In the summer of 2016, we turned bullish on US stocks because corporate profits shifted from negative to positive growth. This proved to be a great call. In 2017, S&P reported earnings grew by 18% and the S&P had a great year appreciating over 21%. This is no coincidence as stock prices typically follow earnings over time.

Interestingly, the street is expecting another year of strong earnings growth of 16% operating earnings growth in the year ahead. That would be great but I think this number is likely too conservative. On September 7th, street estimates were for S&P earnings of $144.88; and at year end, estimates improved to just $145.36. Of course we know that there was a significant event in this time as tax reform was passed to cut corporate taxes. It is clear to me that Wall Street analysts haven't factored in tax reform into their estimates so revisions should move higher and could come in significantly higher.

Buybacks and dividends

US corporations are set to get a boost from a tax cut from 35% to 21%. For many multinationals, they aren't paying anywhere close to 35% so it won't be this drastic a cut for many S&P 500 constituents. But the new tax bill also sets a one-time mandatory tax of 8 percent on illiquid assets and 15.5 percent on cash and cash equivalents for about $2.6 trillion in U.S. business profits now held overseas. Some of this money will come back onshore and combined with the tax cut, US corporations are set to be flush with cash. The question is: what will they do with this boost to their cash flow?

snp uses of cash flow

As you can see from the chart above, corporations have been increasingly using cash flow by returning it to shareholders via share buybacks and dividends. There has been little increase in capex spending. With the boost in net income and cash moving onshore, this should further boost earnings in 2018. Could we see 25%+ earnings growth? We very well could given this backdrop.

These are a couple of reasons to favor US stocks over international stocks which aren't getting an additional tax boost to their earnings. This could be another big year for the US stock market!


Share This Story, Choose Your Platform!

About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.