With the New Year almost upon us, Wall Street soothsayers are out with their predictions for 2017.
As usual, they are predictably restrained. Most projections from the big investment banks and brokers converge around the S&P 500 closing the year at 2,350 — a scant 5% above current levels.
Only one strategist — Merrill Lynch’s Savita Subramanian — dares to suggest that 2017’s gains could be as much as 20%.
That’s a big number.
A 20% gain in U.S. stocks from current levels would put the Dow at 24,000, the S&P 500 at 2,700 and the Russell 2000 at 1,650.
Yet, if you combine robust earnings growth, greater infrastructure spending, tax cuts and deregulation with a boost to the market’s “animal spirits,” 2017 could be a banner year for U.S. stocks.
Why U.S. Stocks Could Surge in 2017
I see two crucial factors converging, which could send the U.S. stock markets surging by double-digit percentages in 2017.
First, the fog of the earnings recession in the S&P 500 has lifted. This was always somewhat of a red herring, with the energy sector bearing the brunt of the weak headline numbers.
Today, energy stocks are recovering, with Dow components Chevron (CVX) and Exxon (XOM) expected to grow earnings by 277% and 84%, respectively. Other S&P 500 sectors are also gathering steam.
The current forecast of 11.5% earnings growth and 5.9% revenue growth for the S&P 500 are the best since 2013. The Dow Jones Industrial Average fares even better with earnings expected to surge 14%.
Second, U.S. stocks have a strong recent history of outperforming in the first year of a presidency. Since the year 2000, stocks have had three 20%-plus years: 2003, 2009 and 2013.
Note that two of the three recent 20% gains came the year after a presidential election.
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