The S&P 500 isn't just in record territory on the chart. It's also on one of its best annual winning streaks ever.
2016 was the eighth consecutive year that the S&P 500 finished in the green. That is the second-longest annual win streak ever, even including its 1982 to 1989 run. The S&P 500's best annual winning streak stands at nine years, stretching from 1991 to 1999. 2017 is the year the S&P 500 has a chance to tie this impressive streak.
There's no question U.S. stocks will have their work cut out for them this year. U.S. and global economic growth remain stubbornly slow. The S&P 500's average P/E ratio is at a multi-year high. And higher bond yields are attracting more attention from investors.
Despite the usual bevy of challenges, I believe the S&P 500 is up to the challenge. There are three reasons the leading U.S. index is set to close the year at another all-time high.
The S&P 500 Will Return To Earnings Growth In 2017
The S&P 500 has been trapped in a nasty earnings recession for most of the last six quarters. That streak was finally broken in the third quarter when earnings increased 3.8% from the same period last year.
Looking forward, S&P 500 earnings are expected to accelerate from here. Fourth-quarter earnings are expected to have grown around 5% and total S&P 500 earnings are expected to continue that growth to reach somewhere between 10% and 12% in 2017.
Some of this good news is already priced into the S&P 500 now. That's one of the reasons the index rallied in the fourth quarter. However, I still expect this return to earnings growth to be a strong catalyst for the S&P 500 in 2017.
Corporate Tax Reform Could Be A Huge Catalyst For U.S. Stocks
The United States has the highest corporate tax in the world. At 35%, it is almost 200% higher than Ireland's rate of just 12%. However, President Trump has stated that one of his top goals is corporate tax reform. These reforms would be two-tiered.
First, he has plans to drop the corporate tax rate from 35% to between 15% and 20%. Second, he will create a corporate tax holiday on foreign-held cash.
Right now, S&P 500 companies are holding around $2 trillion in profits in foreign bank accounts. These companies are choosing not to repatriate this cash because it would be subjected to a 35% tax. Trump has proposed offering a one-time repatriation rate of 10%.
Both of these reforms would stuff tens of billions of extra dollars into the coffers of the U.S. companies.
I expect the S&P 500 to use that cash to invest in jobs and growth. But I expect even more of that cash to be used for two things -- huge dividend hikes and massive share buybacks. Both would be very good for stocks prices.
U.S. Stocks Are The Most Trusted In The World
There's no question the S&P 500 has its problems. U.S. companies are struggling to grow revenue and earnings while the index is trading with its highest P/E ratio in years. However, despite those challenges, investors still trust U.S. stocks a heck of a lot more than international stocks.
Taking a look at other regions of the world, that doesn't come as a surprise. For example, China's economy has been slowing for almost 10 years. Brexit revealed major weakness in the European Union. And South America's largest economy, Brazil, is in freefall.
Compared to these options, utility companies in the S&P 500 paying fat 4% dividends look pretty good.
Risks To Consider: Bonds yields recently jumped to a multi-year high. While that is great for retirees and income investors, I do perceive it as a threat to the S&P 500. I expect higher bond yields to attract capital that would have flowed into dividend stocks .
Action To Take: Despite the great eight-year run, I am expecting another positive year for the S&P 500. Buy index funds and blue-chips, hold them for the rest of the year, and look for gains. I recommend iShares Core S&P 500 ETF (NYSE: IVV ) as a simple and low-cost strategy to profit from my bullish outlook.
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