2017 ended as strong as it started. Alexa, Amazon and technology stocks continue to amaze by leading stock markets into record territory at the end of the year. Our family acquired an Amazon Echo Show at the school fundraiser in October. I wasn’t overly impressed to acquire an “overpriced blue tooth speaker.” But, I have to admit that as I learn more about what Alexa can do for us, I’m getting pulled in. Alexa played Christmas music over the holidays, filled us in on the latest news, brought us weather from across the globe and today I used the shopping list at the grocery store for the first time. The attractiveness of what it can offer has pulled me in much like these leading technology stocks have done to investors over the past several years. The “FANGS” are alive and kicking.
Here are a few notable Christmas list items that were delivered in 2017. Alexa, please add the following to my Christmas list:
1. 12 consecutive months of positive stock returns. The S&P 500 delivered 12 months of positive stock returns in 2017. Although March price return was negative, dividends pushed performance into positive territory.
2. Tax Law Changes to Benefit Markets. A cut in corporate tax rates in 2018 helped prop up stock market returns coming into the end of the year.
3. Strong Corporate Earnings. FactSet is estimating 2017 S&P 500 earnings growth to come in at 10.9%. This would mark the highest annual earnings growth since 2011. Energy, Materials and Technology sectors are expected to see the strongest earnings growth.
4. Strong Economic Conditions. The Bureau of Labor Statistics reports the unemployment rate as of the end of November at 4.1%, down from 4.7% at year-end 2016 and 9.9% at the end of 2009. U.S. GDP grew over 3% year over year in the second and third quarters of 2017, the strongest back-to-back quarters since 2014.
At the beginning of 2017 I stated that “equity markets remain strong due to positive economic and earnings growth”. I added a note of caution as valuations had increased significantly. Coming into 2018 the same conditions hold true. Valuations are more elevated than they were a year ago, which creates more need for caution. Prices are currently 22.8 times trailing 12-month earnings versus 20.7 times a year ago and the 10-year average of 17.0 times. The higher the price-to-earnings number the more earnings need to grow to justify rising stock prices.
Economic conditions remain healthy and the outlook for corporate earnings is bright. In addition to positive revenue and earnings growth tailwinds, corporations will benefit from tax reductions in 2018 and international strengthening. A couple of areas that could warrant additional caution will be the potential for accelerating inflation and increasing U.S. interest rates.
While we’re holding out on becoming an Amazon Prime member, I’m going to enjoy exploring more ways Alexa can enhance my life. Technology stocks will likely continue to offer opportunity for long-term positive returns. With lofty valuations, however, a shift in leadership may be afoot. Don’t count out those value-oriented stocks just yet. Even Amazon shoppers are always looking for a bargain!