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Investors jazzed up by the sizable swelling of their 401(k) balances in the first half of the year might want to lower their expectations for the rest of 2017.
Stocks rose sharply in the first six months of 2017, with the broad market rising 8%, outstripping the return most Wall Street strategists predicted for the full year and doubling the average 4% January-thru-June gain since World War II, according to research firm CFRA.
But the best days for the stock market this year may already have occurred, many Wall Street pros say.
What could cap future gains is a market that’s gotten too expensive, political gridlock, an economy still not growing fast enough and fears that top-performing tech stocks will cool off. On Thursday, tech took a beating, with the Nasdaq composite tumbling 1.4% as investors feared share prices in the industry had grown too pricey compared with earnings.
“It’s hard to imagine the second half being as good as the first,” says Bill Stone, global chief investment strategist at PNC Asset Management.
And the start of the year was very good. The Dow Jones industrial average topped 20,000 for the first time and made 22 record highs . U.S. companies posted their best quarterly profit growth in six years. And electric carmaker Tesla eclipsed GM as the nation’s most valuable auto company.
Tech stocks have shined the brightest. The Nasdaq — powered by 25% to 30%-plus gains from tech giants like Apple and Facebook — surpassed the 6,000 milestone. Amazon and Google parent Alphabet joined the “$1,000 Stock Club” only to end the quarter a bit short of the mark.
But gains of that size aren’t likely to persist, most analysts say. It’s also possible prices will be lower by year end than they are now. The most bullish Wall Street strategist believes the market can climb another 7.3%. The least optimistic prognosticator sees the market falling 6.1% from here.
Investors might benefit from investing some 401(k) money overseas. Investment opportunities may be better in foreign stock markets, such as Europe and emerging markets, where economic conditions are improving and stocks are trading at cheaper prices relative to earnings, Wall Street pros say.
What’s behind the more muted outlook for U.S. stocks?
A lot of good news and optimism are already reflected in higher stock prices, which are now expensive relative to earnings based on history.
There’s also a feeling that the market’s fast start has stolen from gains that might have come later this year.
The blue chip Dow gained 8% in the year’s first six months. The tech-packed Nasdaq composite soared nearly 14.1%. And the large-company Standard & Poor’s 500 stock index rose 8.2% to 2,423.41.
Stocks have shrugged off challenges. President Trump’s stalled economic agenda. The Federal Reserve dialing back its stimulus. A June selloff of market-leading tech-stocks like Facebook and Apple. Investors focused on the positives instead, such as healthy profits, a global economic upturn and the longest period of market calm in nearly 25 years.
But few stock strategists on Wall Street expect stocks to repeat their good fortune, despite CFRA research that shows stocks have posted average gains of 5.1% in the final six months of the year after rising 7% to 12% in the first half.
“The market has run as far as it is gonna run,” says Brian Nick, chief investment strategist at TIAA Investments.
Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, expects stocks to suffer “modest” declines the rest of 2017.
Jonathan Golub of RBC Capital Markets, the street’s biggest bull, says he thinks the market will be 6% or 7% higher at years-end, driven by an economy that’s in little danger of recession.
Still, the market’s success has raised the hurdles it faces. Key market drivers early in 2017 are unlikely to provide as big a tailwind.
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The market’s main obstacles include:
►Disappointing data. It’s possible that the best economic numbers of 2017 might already be behind us.
Investors, says Stone, have likely already seen the best quarter of corporate profit growth in the first three months of 2017, when earnings increased 15.3%. Analysts see profit growth slowing to 7.9% in the April-thru-June quarter, earnings-tracker Thomson Reuters says.
The U.S. economy could also disappoint. GDP, which was expected to pick up sharply after 1.4% growth in the first quarter, hasn’t reaccelerated as hoped. Second-quarter growth is now tracking at 1.9%, Barclays says, less than forecast.
“U.S. data has been kind of ugly lately,” says TIAA’s Nick. “We need to see numbers come back because we need the growth outlook to be vindicated.”
The good news? Nothing in the data suggests the U.S. will “tip into recession,” Stone says. And that’s key as recessions typically are the cause of severe stock market declines.
No recession means higher stock prices, says Golub. “People are struggling with the fact the economy is pretty blah,” he says. “But blah is great,” since markets only fall part when you have a recession.
►Pricey shares. The market’s big gains this year have pushed the S&P 500’s valuation up.
“Prices are stretched,” says Well Fargo’s Wren.
With stocks no longer cheap, it will take a stronger economic rebound to make stocks attractive.
► Fed fears. The U.S. central bank seems poised to boost short-term interest rates a third time in 2017 and to start paring back its $4 trillion-plus bond portfolio later this year despite weak inflation data and a recent spate of soft data. Both Fed moves mean less stimulus for the economy and markets.
There’s another problem: Investors don’t think the Fed will be as aggressive as they say. That disconnect could be a problem for stocks if they are wrong.
“The market and Fed are playing a game of chicken,” says Michael Arone, chief investment strategist at State Street Global Advisors. “Something has to give.”
► Policy gridlock. The outlook is also clouded by uncertainty that Trump will get his stimulus agenda passed. Big tax cuts for corporations, which would boost profits, are what Wall Street wants. But if that tax policy stalls or is pushed out to 2018, it would lead to disappointment.