Stock Market Outlook 2018: Tech Stocks Set to Deliver Big Gains

Stock Market Outlook
iStock.com/phongphan5922

Bullish Stock Market Outlook for 2018

The country is in a deep freeze, but the stock market is sizzling hot as the bull market looks to reach nine years in March.

Call this overhyped euphoria or irrational behavior in an inefficient stock market, but the reality is that investors are making some astounding returns, with more to come this year.

At this time, I usually offer my insight into the prospects for the stock market for 2018. Just look at the first week of the New Year: the Dow is already recording its best start since 2006 after blowing above 25,000. Consider the NASDAQ break at 7,100 and the S&P 500 break at 2,700 and you can’t ignore the fact that the animal spirits are alive.

It is clear that the key driver of the surging stock market is the expected positive impact of the Trump tax cuts that take effect immediately.

Advertisement

In the best-case scenario, a corporate tax rate of 21% is a sign to the world that America is fighting hard to drive its companies and push earnings higher.

There is no guarantee that the monetary benefits from the tax cuts will help fully offset the additional debt that will be added for the cuts to happen.

My view is that the tax cuts will be accretive to earnings. The S&P 500 earnings are estimated to accelerate by 11.8% this year, bringing the index valuation more in line with historical valuations. But remember, this is based on assumptions for strong growth.

If you are looking for the top stock market sector for investors, FactSet Research Systems Inc. (NYSE:FDS) predicts it will be the battered-down energy sector with earnings growth of 41.5% year-over-year. Other sectors expected to see good growth are materials, financials, and information technology. (Source: “Double-Digit Earnings Growth, High Profit Margin Projected for S&P 500 in 2018,” FactSet Research Systems Inc., last accessed December 26, 2017.)

The Federal Reserve suggests that the economy could grow at 2.5%, which could be conservative, given the tax cuts. President Donald Trump suggested four percent is doable, but this is extreme. The president has also become a stock market visionary, saying the Dow could reach 30,000 this year.

The reality is that, based on what we saw with the stock market in 2017, you never know what can happen.

My Predictions for the Stock Market in 2018

At the start of 2017, I was bullish on the stock market and estimated gains of about 10% to 15% for the major stock market benchmarks. My assessment was correct, but I vastly underestimated the Dow and NASDAQ.

What happens in 2018 will also be dependent on the global economy and China.

We could see a stronger small-cap segment, given the tax cuts and economic renewal that tends to reward small companies.

The Russell 2000 lagged behind in 2017, but I see the index rising to 1,700–1,750. In reality, the index could surpass these targets.

Stock Market Outlook Chart

Chart courtesy of StockCharts.com

Technology will likely continue to be a core investment, but I doubt the NASDAQ will repeat 2017. My initial target is 7,700–7,800 for 2018, which may be conservative. Areas I like include mobile, chips, Internet, financial technology (FinTech), and the cloud.

fintech stock chart

Chart courtesy of StockCharts.com

With the tax cuts, big U.S. companies will benefit from lower taxes and will be able to repatriate capital into the country. The funds will be used for capital expenditures (CapEx) and the return of capital to shareholders via share buybacks and higher dividends.

The Dow Jones Industrial Average could trade up to 27,000–28,000, as my initial target. Trump’s target of 30,000, representing a 20% return, is unlikely—unless the stock market grows more irrational.

Stock Market Price Chart

Chart courtesy of StockCharts.com

The S&P 500 easily blew above 2,700 and, if energy does take off, the index could target 3,000, since energy accounts for about 20% of the index.

Stock Market Outlook Price Chart

Chart courtesy of StockCharts.com

Analyst Take

Enjoy the fruits from the past year. This year should see the stock market jettison higher, thanks to the gifts from the White House. But how high stocks go will also largely depend on what happens to trade deals and the ability of the global economy, specifically China, to expand their economies.