Strong Profits and Corporate Tax Cuts Buoy U.S. Markets

As January drew to an end, the Dow Jones Industrial Average continued to surge, extending its rally to log a year-to-date increase of 7.7 percent on Jan. 26. The last Friday of the month also saw record highs for both Nasdaq and the Standard and Poor’s 500 Index. Analysts greeted the news with enthusiasm, though many tempered their reports with some measure of caution. The extraordinary staying power of the current bull market – a staggering eight years of gains – coupled with generally low market volatility and relatively high price to earnings ratios suggests to some that U.S. stocks are overdue for a downturn. Investors welcome subdued market volatility and brokers are no different; however, most note that this trend cannot continue forever. The possibility of trade or geopolitical skirmishes remain as strong as ever, and some analysts fear that investors may have become lulled into a false sense of complacency and will be more likely to overreact to future market volatility. But for now, no one can deny that markets worldwide are off to a great start.

Market advisors note that the big corporate tax cuts, low unemployment and solid consumer confidence – the highest recorded in almost 20 years – have all contributed to giving U.S. markets a strong start for 2018. This optimism has spurred retail investors to get back into the market, as is evidenced by Bank of America reporting a record influx of $33.2 billion into stocks during the last full week of January.  

With so much to celebrate, why are some Wall Street gurus introducing a note of caution? Primarily, it’s because many U.S. stocks have hit multiyear highs, P/E ratios for the U.S. market are higher than other major stock markets, and U.S. corporate profits are at near highs, too. In this type of scenario, brokers see less opportunity for future gains – for investors to make money on their stock holdings. European and emerging markets also attained major highs in 2017 (23 percent and 32 percent increases, respectively), but many researchers believe that they might offer better growth opportunities than U.S. stock markets.

As noted earlier, optimism and record market highs are a worldwide trend. Nearly all the 47 markets that make up the Morgan Stanley Capital International’s All Country World Index showed gains in 2017 – and as brokers love to say, “A rising tide lifts all boats.” This surge means valuations are up throughout various sectors and across the globe. With this in mind, careful analysis and research will be crucial if investors are to find stocks whose valuations will continue to rise. History suggests that judicious stock picking and a willingness to consider offshore investment options will both be important in 2018.

The paragraphs above are intended as general commentary. They are not intended to replace the advice of your personal tax and investment professionals.

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