By Joyce Yu
Wall Street looks set to end 2017 on a high with the U.S. stocks opening higher today, the last trading day of this year. The equity market is expected to continue its rally in 2018 as a drop in the corporate tax rate will likely boost the economy and corporate profits, but strategists say sizable gains could either be short-lived or elusive.
The bull has been running for nearly nine years, with the S&P 500 climbing 20% for 2017 – its biggest increase since 2013. The best-performing S&P stock goes to Align Technology Inc., the maker of the clear teeth-straightener Invisalign, a relatively small provider of dental products which gained 136% as of Dec. 28.
2017 was indeed a good year for health-care stocks – two health-care companies are among the index’s 10 best-performing stocks, and four health companies made into the S&P 500’s 20 biggest gains list. This compares with 2016, when only one health-care stock was among the S&P 500’s 20 biggest winners.
Looking ahead, the drop in the corporate tax rate in 2018, to 21 percent from 35 percent, is seen by many as the biggest driver for the stock market next year, despite potential pitfalls. With the S&P 500’s price/earnings ratio – a measure of stock prices against expected profits – standing around its highest level since June 2002, the stocks just don’t look cheap.
Commenting on the tax bill, David Kelly, chief global strategist at J.P. Morgan Asset Management described the bill as “more carbs and less protein,” because the tax overhaul will improve spending but does nothing to boost productivity.
“It’ll be a one-year wonder,” Kelly told the Reuters. “People should enjoy the party while it lasts but just make sure you know where your coat is.”
Wall Street’s rosy forecasts seem “well supported by the tremendous string of good news which the economy has delivered,” The Reuters quoted Jim Paulsen, chief investment strategist with Leuthold Group in Minneapolis.
“The problem with getting good news is that at some point you can’t be positively surprised anymore,” he added. “We’re going to have a 10-15% correction at some time in 2018. I wouldn’t be surprised if we’re down for the year. If we get a correction and people get scared I’ll probably be buying again.”
With most investors remaining optimistic, the market however has history against it. The S&P 500 rises on average 1.3% in the so-called Santa Clause rally – the period between Dec. 22 and Jan. 3 – according to Hirsch. This year, the S&P has risen just 0.1% so far.