Wall Street observers advise caution with rising stocks

This article is more than 12 months old

US stocks are expected to keep rising this year because a massive drop in the corporate tax rate is seen boosting the economy and corporate profits but strategists said sizable gains could either be short-lived or elusive.

The bull market is on track to mark its ninth birthday in March, with the S&P 500 climbing 20 per cent for 2017 - its biggest increase since 2013.

The drop in the corporate tax rate this year, to 21 per cent from 35 per cent, is seen by many as the biggest factor for the stock market next year.

Yet 2018 share gains are expected to be smaller than 2017 with the S&P 500's price/earnings ratio around its highest level since June 2002.

Many on Wall Street cited potential pitfalls though they see no signs of a recession.

Some said the tax bill's benefit will be short-lived.

Dr 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.

Several strategists cited the risk that faster economic growth could cause inflation to increase at a pace that would lead the US Federal Reserve to raise interest rates faster than expected.

Wall Street's rosy forecasts seem "well supported by the tremendous string of good news which the economy has delivered", according to Dr Jim Paulsen, chief investment strategist with the Leuthold Group in Minneapolis.

He does not expect a recession. But when the economic surprise index - which compares economic data to consensus expectations - is at high levels, equity performance tends to be weaker, he said.

The Citi Economic Surprise index was at 77 last Thursday, not far from its almost six-year high of 84.5 reached on Dec 22. - REUTERS