The outlook for the U.S. stock market next year ranges from a gain of about 16% to nearly no gain at all.
It's crystal ball time for Wall Street stock strategists.
For 2018, will it be a big gain for stocks? Or little or no gain?
The most optimistic forecaster says the U.S. stock market — which has risen nearly 20% this year — will post another year of sizable returns.
The market's biggest skeptic thinks the rally will stall and stocks will end next year pretty much where they're trading now.
That said, year-end predictions are more art than science. And predicting the future isn't necessarily Wall Street's strong suit. At the start of 2017, for example, not a single strategist at 18 top banks saw the Standard & Poor's 500 stock index rising as much as it has. The average gain predicted was 5.5% and the biggest bull saw stocks rising 12%, according to Bloomberg.
If the average prediction had been right, a 401(k) investor with $10,000 invested in the S&P 500 at the start of 2017 would have gained $550. That's well shy of the market's actual return of nearly $2,000.
Reviewing Wall Street pros' predictions for the year ahead, however, provides investors with an outline of factors that might move stock prices.
A USA TODAY analysis of more than a dozen 2018 predictions from Wall Street's biggest banks found a wide variation in where stocks are headed. The most bullish year-end price target for the S&P 500 is 3,100, or nearly 16% higher than its current level of 2,680. The least optimistic prediction is 2,750, which represents a gain of less than 3%. The average target is 2,883, or a return of roughly 7.5%.
No one is calling for a big drop in stock prices.
The reason for the most bullish call on Wall Street can be summed up in one word: earnings. And investors can point to President Trump and the Republican Congress, who have put into law a tax cut plan that will likely boost U.S. companies.
Tony Dwyer, the chief market strategist at New York financial firm Canaccord Genuity, says lower corporate taxes under the plan will add up to bigger profits and larger stock gains in 2018.
Dwyer last week raised his year-end 2018 target for the S&P 500 to 3,100, up from an earlier prediction of 2,800, when it became clear that the proposal to slash the corporate tax rate to 21% from 35% would become a reality.
Wall Street's biggest bull now expects the 500 big companies in the index to post overall earnings per share of $155 next year, up more than 10% from his prior earnings forecast that didn't include the tax cuts.
"Clarity on tax legislation," is bullish for stocks, says Dwyer, adding that companies will return some of their tax windfall to investors through dividends and stock buybacks, which makes their earnings growth look better.
Dwyer is advising investors to buy stocks next year even if they suffer periodic declines in price.
The biggest beneficiaries of corporate tax cuts, he says, will be financial companies, including banks, and the energy industry, which should both see profit boosts of about 20% under the new tax law.
And while Dwyer says there is a good "possibility of a near-term correction," he says the market still has a number of factors working in its favor. His upbeat outlook for stocks assumes the market will benefit from a continuing recovery in the global economy, accelerating business activity in the U.S., more investment spending by businesses, rising wages and the profit boost from corporate tax cuts.
After big gains this year, most Wall Street strategists see the market posting single-digit percentage gains in 2018. David Kostin, chief equity strategist at Goldman Sachs, whose year-end S&P 500 target of 2,850 is near the average, sees the market rising 6.3%.
Kostin downplays fears of a mania and bases his outlook on "rational exuberance."
The key underpinnings of the market remain in place, including faster GDP growth, slowly rising interest rates and corporate profit growth aided by tax cuts.
"The bull market will continue in 2018," Kostin says.
Don't expect another year of big gains and market calm, says Michael Wilson, chief U.S. equity strategist at Morgan Stanley.
Instead, prepare for bigger price drops from time to time and an annual gain of just 2% to 3% in 2018, he says. His year-end target is 2,750.
Why is Wilson, one of Wall Street's biggest bulls in 2017, turning more cautious?
A lot of the good news, such as improving growth around the globe and strong corporate earnings, may already be reflected in higher stock prices, he says. Investors, he warns, might start pricing in "deteriorating" business conditions.
In 2017, virtually all types of stocks, both in the U.S. and around the world, went up together, due to a rare occurrence of "synchronous growth," a term that describes a world in which virtually all economies are growing at the same time.
"That is likely to change in 2018," Wilson warns in his outlook report. "Calm is likely to wane," too.
The market could get more turbulent as the global recovery becomes more uneven, or less synchronous, Wilson says. He also expects corporate earnings growth, a key driver of stocks in 2017, to peak in the first half of 2018.
More tepid profits "inevitably will bring some heartburn for investors," Wilson notes.
Wilson also points out that the economic recovery is in its ninth year, or in its late stages. And while an aging recovery is "not bearish" for stocks, it does mean the U.S. economy will eventually suffer a recession, he says.
And while Wilson says it's too early to call for an economic contraction, investors may start to reprice stocks at lower levels to account for a recession in 2019.
Next year might also be when the market finally sees "full-blown euphoria," with retail investors plowing money into stocks, signaling a peak in prices, he adds.
Participation from retail investors "may be the final missing ingredient to conclude this cyclical bull market," Wilson wrote. "We suspect that could happen in early 2018."