There’s no question 2017 has been an exceptional year for U.S. stocks, but investors are already turning their attention to what 2018 will bring. Argus Research Group CEO John Eade recently compiled 10 stock market themes investors should be watching in 2018, including individual stock recommendations for each theme. The remarkable bull market is approaching its tenth year, a point at which Eade says investors should typically begin worrying about slowing profit growth, stretched valuations and rising interest rates. However, despite the potential headwinds, Eade says the following 10 themes will drive stock prices even higher in 2018.
- Dividend Growth
Most experts expect interest rates to continue to rise in 2018, putting pressure on divided-paying stocks to compete with fixed income assets, such as long-term Treasuries. In addition, many U.S. companies will be flush with cash thanks to a booming economy and corporate tax cuts. Some companies have already committed to using the extra cash from tax cuts to increase capital return programs. Eade says investors should focus on companies with strong balance sheets and track records of growing dividends by at least 10 percent annually. Argus recommends dividend stocks such as Home Depot Inc. (HD).
- Tax Cuts
Eade expects companies and individuals to partially spend and partially save the extra cash they get from tax cuts in 2018. The Tax Foundation estimates tax reform could boost U.S. GDP by 3.7 percent, increase wages by 2.9 percent and create an additional 925,000 full-time jobs. Argus estimates most large U.S. companies will get a 5 to 8 percent direct boost to earnings per share thanks to the tax cut. Small cap stocks and companies with entirely domestic businesses are best-positioned to benefit. Argus names Lowe’s Companies, Inc. (LOW) and Costco Wholesale Corporation (COST) as big tax cut winners.
- Confident Consumers
A booming economy, historically low unemployment rates and an improving housing market all have U.S. consumers feeling pretty good about their current financial situation. According to Eade, U.S. consumer confidence is now at its highest point in 12 years, and Americans will likely continue to spend liberally in the year ahead. Companies who sell discretionary products and services, including luxury products, electronics, entertainment, collectibles and travel, could be big winners in 2018. High-end restaurants and clothing retailers could also benefit from confident American consumers. Argus suggests Walt Disney Co (DIS) and Wynn Resorts, Limited (WYNN).
- Rising Interest Rates
All indications suggest that the Federal Reserve is finally on track for steady interest rate hikes in coming quarters. Rising interest rates will ultimately cut into corporate profit margins, but there are plenty of companies that will benefit from higher rates, at least initially. Banks, for example, should be able to boost their net interest margins. Insurance companies should also be able to generate higher returns on investment portfolios. Finally, higher inflation triggered by rising interest rates should also help support commodity prices. Argus recommends BB&T Corporation (BBT), Metlife Inc (MET) and Chemours Co (CC).
- Oil Market Recovery
Investors have been hearing about a recovery in the global oil market for years now, but Eade says emerging market growth coupled with an extension of OPEC production cuts could finally help rebalance the oil market in 2018. Argus estimates emerging market economies, including China and India, are expected to grow by 4.8 percent in 2018. Eade says emerging market demand for oil should keep the price of WTI crude oil at an average price of $58 per barrel in 2018, up from $52 per barrel in 2017. Argus recommends Exxon Mobil Corporation (XOM) and Schlumberger Limited (SLB).
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