Our positive 2017 outlook for most of the world’s stock markets is based primarily on our expectation of acceleration in global GDP growth from about 2.8% in 2016 to 3.2% next year. The catalyst will be the expectation of a return to growth brought about by stimulus initiatives from key governments and accommodative policies of the world’s major central banks. This will mark the first significant pickup in global growth since 2010, and should diminish the deflationary fears that have been dominant during the past several years. Financial markets have already started adjusting from low global growth, inflation, and interest rates to higher growth and reflation. We expect this trend to continue, but we are aware of potential risks which could alter the positive case significantly.
We expect the S&P 500 Index will mount a 10-12% advance in 2017, which will reflect a U.S. GDP rise from an estimated 1.6% in 2016 to 2.5% in 2017 and a low double-digit spurt in corporate profits. The incoming administration has promised voters it will produce job gains and a boost to growth arising from tax cuts, increased infrastructure and defense spending, and deregulation. The recent jump in consumer and small business confidence and the rally in stock prices to near record highs are signs of elevated expectations. We consider the S&P 500 Index to be fully valued. Thus stock prices will likely rise in line with the increase in corporate earnings.