The stock market is ascending with record highs reported almost daily. The positive trend is a valid positive economic signal for 2017. We think the market is likely to continue in its positive trend for the following reasons:
o The rate-of-change signature is positive (the market has upside momentum)
o Corporate profitability is improving
o Corporate tax cuts are likely out of Washington D.C. in 2017
o Non-financial leading indicators are also heading higher
This does not mean there aren’t risks. There always are. One risk is that higher interest rates have a history of being a precursor to an end to stock market rise. Another risk is that higher costs in 2018 could offset the cut in corporate taxes.
There is also the risk that the stock market is becoming overvalued. Our analysis of the S&P 500 Price Earnings Ratio suggests that the market is not yet in “overvalued” territory and therefore treading on thin ice.
We asked our business partner, Clark Bellin, what he thought about the market valuation issue. Clark said, “It is getting up there but not at euphoric levels. I'm not concerned but would like to see stronger earnings to continue to support the PE and continued growth of the S&P.” At ITR Economics, we think those stronger earnings are indeed ahead for 2017. Clark went on to say, “There is enough caution out there; that that is comforting. Once we hit euphoria, I get nervous. Euphoria is where people stop looking at fundamentals and think things are always going up in a specific stock or a sector.”
We aren’t there yet. Enjoy the positive leading indicator signal(s) coming out of the S&P 500 and prepare for economic rise in 2017.