• Equities will benefit from continued strength in the U.S. economy 
  • Trump policies are pro-growth
  • Outlook for EPS growth improved

While volatility is likely to increase from recent levels, we believe that 2017 will see positive equity returns and that the secular bull market will continue. We expect the pace and direction for U.S. equities to be influenced by three key factors:

Continued Strength in the U.S. Economy

Due to a number of factors, the U.S. economy enjoyed solid growth in the second half of 2016. We expect a continuation of modest growth in 2017 as fundamentals for the consumer remain encouraging. Growth in jobs has been solid, compensation is rising, and the savings rate has been increasing. Consumer net worth has been helped by rising housing and stock prices, and confidence is on the rise. Despite modest increases in interest rates as a result of the Feda stronger consumer bodes well for 2.0-2.5% GDP growth for 2017 and good corporate earnings growth, which is supportive of rising equity prices.

Fiscal Policy and Leadership Initiatives of the Trump Administration

Newly elected President Trump and the Republican-majority Congress are pursuing a pro-growth agenda, including lower taxes for corporations and individuals, deregulation of certain industries, and increased spending on infrastructure and defense. While it will take months for proposals to be finalized, compromises to be made, and budgets to be finalized, we believe something proactive will be accomplished that will have a modestly positive impact on economic growth and ultimately the earnings outlook for companies. However, much uncertainty exists. Mr. Trump has no government experience, his approach to dealing with adversaries and allies is unknown, and whether he will truly pursue policies that are protectionist is anyone's guess at this moment. In other words, will Trump be a president focused on positive intentions or an adversary of free trade and immigration? Depending on Trump and Congress, the resolution of these uncertainties could help or hurt multiples for stocks.

Outlook for EPS Growth and Valuation

Our base case for earnings growth in 2017 is 5.0%, led by 2.0-2.5% GDP growth, 2.0% inflation, and continued stock buybacks. We believe this 5.0% base case can be enhanced by tax cuts. For the moment we are assuming the effective tax rate of S&P 500 companies is reduced from 28.5% to 24.5%, as of July 1, 2017. Assuming this reduction (and all else being equal regarding itemized deductions), our 5.0% growth base case would increase to 9.0%. Should things play out this way, the earnings outlook and demand for stocks would be enhanced and lay the foundation for a positive year for equity returns and a continuation of the secular bull market.



Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

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Index Definitions

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.
The Real Monetary, Fiscal & Exchange Rate Policy Index is Real M2 Money Supply year-to-year change, plus Real Federal Expenditures (12-month total) year-to-year change, less Real Federal Receipts (12-month total) year-to-year change, less Real Broad Index of the foreign exchange value of the Dollar year-to-year change.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations of the economy to improve, expectations of real sales to move higher, current inventory, current job openings, expected credit conditions, whether now a good time to expand, and earnings trend.

The Citi Economic Surprise Index is a data series that measures how data releases have generally compared to economists’ prior expectations. When data is coming in weaker than expected, it declines; when data is coming in stronger than expected, it rises. This doesn’t necessarily mean that it declines when the economy is weakening, just when the data is surprising on the downside. The Index is a weighted historical standard deviation of data surprises.

The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The BofA Merrill Lynch Fixed Income Indices track the performance of the global investment grade, high-yield and emerging debt markets.

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.