It’s clear that the animal spirits so lacking in this bull market’s long climb are returning to Wall Street. And it’s no wonder stocks in the U.S. have been on a tear. Major economies across the globe are on a synchronized growth track, corporate earnings growth both here and abroad is robust, and business executives and consumers are confident. Standard & Poor’s 500-stock index has returned 21% since we published our 2017 outlook, eclipsing even the most bullish scenario in our forecast. That broad market benchmark notched a record high 60 times over the period, leaving stock prices elevated compared with long-term averages by almost every measure. (All prices and returns in this article are as of October 31.
Make no mistake: This bull market is closer to the end of its journey than to the beginning. If it survives beyond August, it will be the longest-running bull ever. But we are optimistic (not yet euphoric) that this bull has some room left to run. “The market will continue to grind higher,” says David Lafferty, chief market strategist at Natixis Asset Management, “but the risks are fairly high.”
Mindful that the broad market has not suffered a meaningful downturn since the 14% decline that ended in early 2016, we think a total return of 8% or so, including roughly two percentage points from dividends, seems reasonable for 2018. Our conservative forecast would put the S&P 500 at about 2730 and the Dow Jones industrial average somewhere in the neighborhood of 24,800 at year’s end. Passage of comprehensive tax reform could push markets higher. And the chance of a runaway rally is increasing, says strategist Ed Yardeni, of Yardeni Research—although, he quips, “an earnings-led melt-up isn’t a melt-up, it’s a bull market.”