Stocks have been on a tear in the first half of 2017, as the U.S. economy has shown signs of continued strength. However, with the Standard & Poor’s 500 index already up more than 9 percent in the first six months of the year, investors should keep their expectations in check when it comes to the second half of 2017.
On Wednesday, Goldman Sachs raised its year-end projection for the S&P 500 by 100 points. Unfortunately, the new year-end projection of 2,400 still represents a 1.6 percent downside ahead for U.S. stocks in the second half of the year.
The S&P 500’s gain of 9 percent in the first half of the year is already near its 9.8 percent historical average full-year return over the past 90 years. Looking ahead, stocks will have several notable headwinds in the second half of the year, Goldman analyst David Kostin says.
“The prospect of accelerating inflation, higher policy rates and rising 10-year bond yields will weigh on S&P 500 valuation,” Kostin says in his projection note.
Goldman estimates that these headwinds will result in a contraction in the average forward price-earnings ratio of the S&P 500 from 18.1 to 17.3 by year’s end.
On the bright side, Kostin says the underlying performance of S&P 500 companies will remain strong through the end of next year. Goldman has raised its full-year adjusted EPS estimate for the S&P 500 in 2017 from $123 to $129. The firm also raised its 2018 EPS estimate from $129 to $139, suggesting a healthy U.S. economy in 2018 as well.
Despite the disappointing outlook for the second half of 2017, Goldman says certain stock sectors will outperform others. The firm projects the strongest 2017 EPS growth will come from the financial sector and the technology sector.
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