By  on December 5, 2017

The nine-year bull market for U.S. stocks still has room for growth in 2018, but the outlook isn’t so great for consumer discretionary stocks such as retailers and apparel and beauty brands.According to Savita Subramanian, head of U.S. Equity and Quantitative Strategy at Bank of America Merrill Lynch Global Research, the S&P target of 2,800 by the end of 2018 will be “7 percent higher than today.”She spoke at a presentation Tuesday on the company’s 2018 outlook. “We’re not done with the bull market yet,” she said, noting that earnings expectations for next year look decent, but could be great with tax reform. Her team is projecting 6 percent growth in earnings per share for the S&P 500, outside of corporate tax-related benefits.Subramanian reasoned that investors “haven’t hit euphoria in the U.S. equity market, which is needed at the end of a bull market.” Her recommendations are sticking with equity stocks in 2018, buying growth shares in materials and financials, and technology stocks. That’s bad news for retail and apparel shares, a sector she has underweighted along with utilities and real estate.According to Subramanian, the problem with consumer discretionary stocks in a period of Federal Reserve tightening of liquidity through interest-rate hikes is that it tends to result in the companies feeling pressure from wage increases and margin squeezes.She also noted that if companies repatriate money from overseas, they likely would use just 50 percent of that for stock buybacks, and reserve the balance for other uses such as mergers and acquisitions. Consumer goods firms also could elect to give some of that back to consumers through lower prices and more promotions. Rather than spur consumers to buy more and provide some revenue growth, Subramanian cautioned that the impact could have the effect of pulling from “tomorrow [or future growth] to today.”Michelle Meyer, head of U.S. economics, forecast 2.4 percent gross domestic product growth in 2018, and then slowing to 2 percent in 2019. She is also predicting inflation to rise to 1.8 percent by the end of 2018, and to 2 percent by the end of 2019. Meyer said the labor market would likely tighten next year, which typically leads to wage growth for workers. She is expecting the Federal Reserve to raise rates this month, and raise rates three more times in 2018 and another two rate hikes in 2019.Ethan Harris, head of global economics, said the global “bullishness on growth is warranted.” For 2018, the economist expects 3.8 percent global GDP growth, up from 3.7 percent in 2017. He said the synchronized global recovery is due mostly to accommodative worldwide monetary policy, leveling off of the slowdown in China and the increasing confidence of investors who have learned to ignore political and geopolitical risks.There were some cautionary points raised by Michael Hartnett, chief investment strategist, who said the “financial returns since 2009 have been abnormally strong.” He noted that wage inflation could be a game changer, since when “wages go up, that’s less good for profits.”Hartnett — zeroing in on the not-so-rosy parts of the economic backdrop heading into 2018 — also said that given the expected higher inflation and rising corporate debt levels and bond volatility, an end to easy monetary policy could be most damaging for corporate debt. Along with record-high art prices, soaring rates for crypto-currencies, exponential Nasdaq growth and climbing global debt levels, there are already signs of possible bubble-like behavior. All that means there could be the potential for a slowing down of global growth in the second half of 2018, he cautioned.

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