Now that tax reform is all but signed into law, some firms and strategists have started to raise their expectations for 2018. 24/7 Wall St. has tracked more than a dozen strategist calls for 2018 on the S&P 500 Index, and the most recent call showed that Credit Suisse’s U.S. equity strategy team raised its 2018 targets on the S&P 500 and in its earnings per share (EPS) expectations.
For 2018, Credit Suisse sees the S&P 500 rising to 3,000 by the end of 2018, and it sees EPS of $155. The firm’s prior target levels outlined in October were for the S&P 500 to hit 2,875 in 2018 and for the index to have roughly $139 in EPS.
Three driving forces were cited: sector dynamics, better economics and taxes. Since the first 2018 forecast, the firm said that corporate results have surprised to the upside and GDP expectations have improved.
For sector dynamics, Credit Suisse sees stronger results in energy and materials (commodity prices) and in the technology sector. These were shown to add an extra $2 to that higher $155 per share target.
The economic front was shown to be getting a boost by stronger gross domestic product. Its growth expectations have improved by 30 to 50 basis points. Lower taxes and robust global demand should add on another 1% to overall earnings growth.
As far as how lower corporate tax rates will apply, an assumed rate of 21% should add roughly $12 (up 8%) to Credit Suisse’s 2018 earnings estimate. That being said, the firm feels that most (but not all) of the tax-related benefits to earnings are likely reflected in stock prices already. The firm now expects the stock market to benefit by the underlying profit growth plus modest multiple expansion. An increase in buybacks could also boost the overall S&P 500 EPS case.
It turns out that there are now only five full trading sessions remaining before 2018. The market has hit new high after new high. The SPDR S&P 500 ETF (NYSEARCA: SPY) was last seen up 19.5% so far in 2017, if you include dividends for total return calculations.