Investment Updates
What's Driving Stocks And How It Affects Portfolios
Published Friday, February 2, 2018 at: 7:00 AM EST
The new tax law is boosting the economy more than initially thought. After the election of November 2016, the Standard & Poor's 500 rose sharply, coinciding with the growing likelihood the law would be adopted. Then, in the weeks after the legislation was signed on December 22nd, Wall Street analysts sharply hiked their earnings estimates for the S&P 500, and stock prices soared to start the year.
Earnings expectations are surging and earnings are ultimately what drive stock prices. Since 2001, earnings on large-company stocks averaged a growth rate of 7.4%. But earnings are not expected to grow a mere 7.4% annually in 2017, 2018, and 2019 - they're expected to grow 12%, 15% and 10%, respectively.
After the new tax law was signed, the average company in the S&P 500 was expected to see profits of $131 a share in 2018. In January, however, expectations were revised upward to about $152, and that is likely to be revised higher still in February. By historical standards, earnings surges are unusual but not without precedent. Still, you have to wonder how much longer the good times can last.
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