The LPL Research Midyear Outlook: A Shift In Market Control states the following four themes may be key to the markets over the balance of 2017:
Monetary policy: Slow path to normalization. Maintaining economic growth without extraordinary central bank support will be key.
Business fundamentals: Now taking control. A focus on well-run businesses with the potential for earnings gains may favor active management.
Economic growth: Confidence not enough, yet. Business and consumer confidence has improved, but greater policy clarity may be needed to spur growth.
Fiscal policy: Pro-growth potential, but when? Fiscal policy support remains likely, but timetable may be pushed back to 2018.
The midyear report maintains confidence in the existing forecasts from “Outlook 2017,” with some minor adjustments:
Economy: GDP growth near 2.5%. LPL researchers continue to look for the U.S. economy to expand up to 2.5% in 2017, although potential delays in passing major fiscal policies introduce some risk to the downside. Data on consumption, employment, housing, manufacturing and services all point toward improvement in the months and quarters ahead following sluggish first quarter GDP growth.
Stocks: 6 to 9% total returns. LPL Research reports a slightly raised 2017 S&P 500 Index total return forecast of 6 to 9%, commensurate with expected earnings gains and up from mid-single-digits previously, driven by: 1) a pickup in U.S. economic growth; 2) mid- to high-single-digit earnings gains; 3) a stable price-to-earnings ratio (PE) of 19 to 20; and 4) prospects for a fiscal policy boost to earnings in 2018. As investors increasingly trust the economy can stand on its own without the need for monetary policy support, business fundamentals should take over as the primary market engine and corporate profits will take on increasing importance.
International: Emerging over developed markets. Though fundamentals in developed countries are firming, growth in Europe and Japan has only gradually improved from low levels. Steady global demand has boosted output for the largely export-driven emerging market economies and driven renewed earnings growth. LPL researchers remain cautious about developed international markets and are more constructive about emerging markets (EM).
Bonds: Limited return potential. LPL Research reported the 10-year Treasury yield is expected to end 2017 in the 2.25 to 2.75% range, with a bias toward the upper end of that range; should Congress make meaningful progress toward enacting fiscal stimulus, the 10-year Treasury yield could rise as high as 3%. Scenario analysis based on this potential interest rate range and the duration of the index indicates low- to mid-single-digit returns for the Bloomberg Barclays Aggregate Bond Index. Divergent global central bank activities, moderate inflation pressures, and attractive valuations for U.S. Treasuries relative to global alternatives may support bonds at higher yields.
For additional insight, view the complete LPL Research Midyear Outlook: A Shift In Market Control.