What's Driving Stocks And How It Affects Portfolios
The new tax law is boosting the economy more than initially thought. After the election of November 2016, the Standard & Poor's 500 rose sharply, coinciding with the growing likelihood the law would be adopted. Then, in the weeks after the legislation was signed on December 22nd, Wall Street analysts sharply hiked their earnings estimates for the S&P 500, and stock prices soared to start the year.
Earnings expectations are surging and earnings are ultimately what drive stock prices. Since 2001, earnings on large-company stocks averaged a growth rate of 7.4%. But earnings are not expected to grow a mere 7.4% annually in 2017, 2018, and 2019 - they're expected to grow 12%, 15% and 10%, respectively.
The consensus of 68 economists surveyed in early January by The Wall Street Journal was for strong growth, averaging 2.7% quarterly through 2018. Meanwhile, the Conference Board's Leading Economic Indicators - a forward looking index - surged at the end of 2017 and the business group's economists cited the new tax law as a tailwind to the expansion. In addition, the International Monetary Fund also cited the new tax law in upping its latest quarterly projection for world growth in 2018 and 2019.
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