A year-long US profit recession has just ended, but earnings growth needs to pick up or stocks will get too expensive.
Caroline Valetkevitch and Noel Randewich –
Wall Street’s rally could be derailed by renewed worries about President-elect Donald Trump’s policies, a resurgent dollar or potential wildcard events like cyber attacks or a trade war, investors say as they look to 2017.
Stocks are at record highs on optimism Trump will boost the economy, and strategists in a recent Reuters poll expect more gains next year. But they also worry about what could derail the market as a surprising 2016 wraps up and an uncertain 2017 awaits.
Here are some potential roadblocks to more gains:
THE DOLLAR CRIMPS EARNINGS
Further strength in the dollar, which has gained nearly 5 per cent since the election, could hobble sales of US multinationals.
“Companies are saying, ‘You know, we’ve got this higher dollar that’s making our business overseas a little more difficult,” Doll said.
A year-long US profit recession has just ended, but earnings growth needs to pick up or stocks will get too expensive. The S&P 500 is now trading at nearly 18 times forward earnings versus a long-term average of about 15, Thomson Reuters data shows.
THE FED GETS REALLY AGGRESSIVE
Stocks racked up big losses earlier in December after the Fed signalled three rate hikes are likely in 2017. While a stronger economy boosts stocks, higher rates can hit spending.
“One risk would be the Fed being a little overzealous and maybe bringing rates up quicker than what makes sense,” said Daniel Morgan, Portfolio Manager at Synovus Trust in Atlanta, Georgia.
POPULISTS DEAL BODY-BLOW TO EU
Anti-establishment candidates are on strong footings ahead of spring elections in the Netherlands and France, and victories for them could strike a critical blow to a European Union already weakened by Britain’s vote to leave.
Ahead of the Netherlands election in March, surveys point to strong gains for the euro-sceptic Freedom Party. In France, far-right National Front leader Marine Le Pen’s popularity recently reached 27 per cent ahead of a May election.
“There is still an overwhelming lack of recognition of the power of populist movements,” said Brad McMillan, Chief Investment Officer for Commonwealth Financial Network.
CHINA’S CURRENCY KEEPS FALLING
Chinese policymakers are wrestling with growing debt and property bubbles, while the yuan currency is near eight-year lows. Last year, fears of crisis in China’s financial markets sparked a global sell-off.— Reuters