The U.S. stock market's bull run since 2009 will extend into 2017 if President-elect Donald Trump's plans to stimulate the economy with infrastructure spending and financial deregulation come to pass, according to strategists in a Reuters poll.
But limiting the enthusiasm are threats by Trump to consider imposing new import tariffs and the prospect of a potentially stronger dollar, with the S&P 500's end-2017 forecast up about 6 % from current levels.
The benchmark index will end 2017 at 2,350 and finish 2016 at 2,210, according to the median forecast of around 40 strategists polled by Reuters over the past week. It closed Tuesday at 2,212.23.
The financial market has rallied and hit record highs since Republican Trump unexpectedly won his White House bid in the Nov. 8 U.S. election.
Worries about his controversial policies leading up to the election have given way to optimism over promises for lower taxes, fewer regulations and more spending. The S&P 500 is up 8 % year-to-date, having gained over 2 % in the weeks since the election.
"Right now it looks as if the bull market is on, and the risks are that even guys like me who put out a very optimistic call were too conservative," said Jonathan Golub, chief equity strategist for RBC Capital Markets in New York. His forecast for the S&P 500 to end 2017 at 2,500 was among the highest in the poll.
The S&P 500 has gone up every year since 2009 except in 2011, when it ended flat, and in 2015, when it posted a slight loss. Part of the expected stock gains will be fueled by a rebound in corporate profits following weak growth in 2016, strategists said.
Analysts expect S&P 500 companies' profit growth of 12.4 % for 2017 compared with a forecast gain of just 0.9 % in 2016, Thomson Reuters data shows. A year ago, 2016 profits were expected to grow 8.3 %.
Profits need to pick up to prevent stocks from getting too expensive though, strategists said, with the S&P 500 now trading about 17 times forward earnings, compared with a long-term average of about 15, according to Thomson Reuters data.
Sectors many of the strategists expect to do well next year are technology, industrials and other cyclicals that tend to benefit from an improving economy. Many also favor financials, which have had a strong run since the election on Trump's plans to cut regulations for the group.
On the flip side, strategists see a less favorable year for utilities and other sectors that tend to underperform in a rising interest rate environment.
Investors expect the Federal Reserve to raise rates in December, and some strategists worry that the pace of future rate hikes to deal with a potential pickup in inflation might be too fast for the economy to handle.
While the deck seems stacked in favor of further gains next year, uncertainties abound, especially since no one knows yet which of Trump's plans will actually materialize into policy.
Strategists cited possible trade friction and protectionist policies as among the biggest worries for next year.
Trump has said he would quit the North American Free Trade Agreement unless it is renegotiated to his satisfaction and that he would declare China a currency manipulator to force negotiations for better trade terms.
His suggestions that his administration could impose 45 % across-the-board tariffs on goods from China have drawn threats of retaliation by Chinese state media against U.S. soybeans and companies such as Boeing Co and Apple Inc.
During the presidential campaign, Trump said his administration would put a 35 % import tariff on goods made by American manufacturers that moved jobs offshore.
"The rally could be cut short if Trump embarks on the more confrontational trade agenda," said John Praveen, managing director at Prudential International Investments.
The dollar, which has strengthened sharply since the election, is likely to dampen earnings for U.S. multinationals if it stays on the same path.
This poll's 2017 year-end S&P 500 target is up from a forecast of 2,310 in the October stocks poll.
The Dow Jones industrial average will end 2017 at 20,450, a gain of 6 % from Tuesday's close of 19,251.78, the Reuters poll showed.