EC What Wall Street And Capitol Hill Could Have In Store For 2017

The final two months of 2016 have delivered plenty of excitement for investors. First, there was Donald Trump’s surprising victory in the November presidential election. Then the Federal Reserve (Fed) finally got around to raising interest rates, as was widely expected, last month.

As 2016 drew to a close, U.S. equities resided near record highs with investors eyeing the next significant round-number conquests for major U.S. indexes, such as the S&P 500 and the Dow Jones Industrial Average. Although the marked didn't break 20,000 last year, 2016 has been quite a ride.

Heading into 2017, claims that stocks are pricey may be exaggerated. The S&P 500 trades at 20 times operating earnings, which is not inexpensive, but not unreasonable considering interest rates remain low. While there are plenty of unknown factors impacting stocks heading into 2017, earnings growth should be healthy. Although I view S&P’s estimate for operating earnings of $131 per share as overly optimistic, I hope we can see earnings of $120 per share, which would put the current price-to-earnings (P/E) ratio between 18 and 19 (based on December 22 prices).1

President Trump: The Wildcard That Wasn’t

The results of the 2016 presidential election are among the most stunning in modern U.S. political history, but that shock was limited to a matter of hours in U.S. equity markets as stocks have clearly come to grips with President Trump. With U.S. election uncertainty in the rearview mirror, investors can begin focusing on Trump’s policies and the potential impact on various asset classes.

For example, Trump pledged to lower corporate taxes within his first 100 days in office, a move that the equity markets would widely embrace. Since Election Day, mid- and small-cap stocks have been thumping large caps because smaller companies typically generate the bulk of their revenue within the U.S. and would be most influenced by a lower tax rate, and they do not have the strong headwinds of a rising dollar.2

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Gary Anderson 4 years ago Contributor's comment

Author asks a good question: Will #Trump and the #Fed play nice? I don't believe they will. While #InterestRates should be at the top of the ceiling, there is a ceiling which if breached will contract the deals and loans made, and ultimately contract the economy. I don't think Trump and his team really respect this fact.

Cynthia Decker 4 years ago Member's comment

I agree, #Trump doesn't respect that fact and tends to be rather bull headed about getting his way. Could spell trouble for his working relationship with the #Fed.