In 2017, equities outperformed bonds for a seventh consecutive year. This equity friendly environment delivered positive stock returns, as measured by the total return of the S&P 500 Index, every month last year for the first time in history.
International stocks were the best-performing equity asset class in 2017, ending a multi-year stretch where international equities lagged domestic stock returns. Emerging market equities returned 37%, while international stocks returned 27% in the aggregate.
Domestic equity returns were also strong. The S&P 500 returned 22%, while midcap stocks returned 16% and small cap equities advanced 13%.
Corporate earnings growth exceeded consensus expectations during 2017, and that was the primary factor driving positive equity returns. Corporate earnings have shown solid sequential improvement since the first quarter of 2016, and stock prices have responded; from the equity market low of February 11, 2016, the S&P 500 has a total return of 52%.
Corporate earnings remain the most important variable in the 2018-19 outlook. Tax reform legislation passed in December should benefit corporate earnings in 2018 and beyond, and provide a tailwind for stocks.
We have established a 2018 year-end fair value target range of 2,700-3,100 for the S&P 500 (about 19.0x estimated 2018 earnings of $150-157), which implies upside of roughly 8-10% from the S&P’s 2017 year-end level of 2,674. Our preliminary year-end 2019 fair value target range is 2,875-3,325 (19.0x estimated 2019 earnings of $164-170). Our single point year-end fair value estimates for 2018 and 2019 are 3,000 and 3,200, respectively. Read More.
See Bridges 2018 Capital Markets Expectations by clicking here.