Analysts: Bull Run Set to Simmer before More Gains in 2018

By Joyce Yu

Philadelphia, PA–Lacking major catalysts, Wall Street closed slightly higher Wednesday. However, the on-going bull market on Wall Street will simmer for the rest of 2017 before moving to higher territory again next year, according to a Reuters poll of strategists who were optimistic about corporate profits but concerned about slow tax reform progress.

Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 260,000 for the week ended Sept. 30, the Labor Department said on Thursday. This is better than Reuters’ poll earlier which forecasted claims to fall to 265,000.

Claims for Texas, Florida and Georgia were affected by Hurricane Harvey and Irma along with Hurricane Maria which are expected to further cut into job growth in September. The economists expected nonfarm payrolls to increase by 90,000 jobs last month after rising by 156,000 in August.

The disruptions to the labor market are, however, expected to be temporary. With claims now remaining below the 300,000 threshold, an indicator of a robust labor market, the job market seems to remain strong.

Beginning end of July, strong third-quarter corporate earnings have bolstered stock markets to new heights which have been further fueled in part by U.S. President Donald Trump’s recent proposals for the biggest federal tax overhaul in three decades. The S&P 500 is currently trading at about 18 times expected earnings over the next year, well above its long-term average of about 15.

“The economy and earnings are pretty good, and they’re the building blocks. That’s what’s given us the good year-to-date (gains) and could continue to cause those of us who think stocks are OK but not great to be too cautious,” Robert Doll, chief equity strategist at Nuveen Asset Management in Princeton, New Jersey, told the Reuters.

Technology stood out among all sectors as a favorite pick for many strategists. The S&P 500 technology index has far outpaced gains in the broader market, advancing 26% for the year so far.

Shares in Chinese internet companies, in particular, shined this year. E-commerce giant Alibaba’s stock has more than doubled, and internet firm Tencent soared over 80%. Other major internet players such as Baidu and have surged roughly 50%. They have outperformed their peers in Silicon Valley. Facebook is up by 46% this year, and Amazon rose around 30%.

“Chinese tech stocks have for sure entered bubble territory,” said Niklas Hageback, founder of Hong Kong hedge fund Valkyria Kapital. “Much of the tech sector appears to be too richly valued.”

Hageback thinks stocks of these companies will fall if any major companies announce disappointing earnings later in the year, predicting potential stock drops of 20% or more.

The market expects to see earnings of Tencent and Alibaba to increase 50% and 40% year on year respectively.