The first quarter of 2017 started off well for the stock market with the S&P 500 gaining just shy of 6% within the first two months of the year(1). But of course, that’s already behind us. So what is in store going forward?
Before we do that, let us look at the macro economic conditions globally.
- Globally the economic conditions firmed up towards the end of 2016 for several developed countries and that momentum has continued on into 2017.
- Global GDP grew 2.7% year-on-year in the last quarter of 2016 which was the fastest growth in over a year. It is set to expand 2.8% year-on-year for the first quarter of 2017.(2)
- Emerging markets did not fare well throughout most of 2016 and are still underperforming compared to the developed countries. However, several South American countries including Brazil’s economic conditions have stabilized and expect to return to growth by as soon as next quarter while Russia’s recovery has also started to pick up steam. Moreover, stronger performances from key economies bode well for global trade.
- The Eurozone showed positive economic data and improving labor markets to keep the recovery on track which have actually lifted the 2017 outlook. Though all eyes continue to focus on the political landscape including the ongoing saga of Brexit.
- Thanks to a pick up in global growth and a weak Yen, Japan has seen expansion through exports and manufacturing despite low personal consumption due to low wage growth.
- China’s start to the year surprised market analysts on the upside, as a booming real estate market and stronger global growth are boosting manufacturing output and investment.
- Growth in the U.S. continues to be fueled by gains in household wealth and a turnaround in investment. The Federal Reserve delivered its second rate hike in three months, as markets expected, analysts believe that the Fed is more confident about inflation prospects and could accelerate its tightening cycle. That along with uuncertainty surrounding Trump’s commercial policies which will continue to weigh on global trade prospects could fuel volatility in the financial markets, particularly in developing countries
Now on to what really matters, the stock market!
We did not see a lot of movements throughout March as investors have been waiting on this next earnings season that just kicked off to see if this recent market momentum can be supported by corporate earnings.
- For Q1 2017, the estimated earnings growth rate for the S&P 500 is 8.9%. If 8.9% is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth for the index since Q4 2013.(3)
Looking ahead, there is a wide distribution of potential policy outcomes that could influence the global economy as well as the financial markets in 2017. We feel that the current fundamental backdrop for the capital markets remain strong at this time. However, a more mature economic cycle combined with policy uncertainty, could easily generate more volatility towards the later part of 2017.