C.J. Lawrence Weekly – 2017 Scoreboard Highlights Consistent Technology Leadership
When we wrote the year-end market summary last year, we noted the high level of sector rotation that took place on a quarterly basis throughout 2016. In 2017, leadership was instead remarkably consistent. Of the major S&P 500 sectors, Technology led all others in three out of four quarters and finished the year at the top of the leader board, having generated a 39% total return. It was followed by the Materials and Consumer Discretionary sectors, which lagged the leader by wide margins, but produced attractive returns of 24% and 23% respectively.
What is also noteworthy is that the relatively high dividend, “bond proxy” sectors finished the year consistently at, or near, the bottom of the performance charts, despite historically low bond interest rates. Telecom stocks finished in the bottom position having delivered a negative return of 1.3% for the year. The Energy Sector Index also delivered a negative annual return (-1.0%) having experienced meaningful negative returns in the first half of the year, off-set by positive returns in the second half.
The broader S&P 500 Index returned 21.8% for 2017, making it the 32nd time the S&P 500 total return has eclipsed 20% in the last 90 years. The strong index performance and a proliferation of index related products may have helped to lift the prices of almost all index constituents. Only four S&P sub-index groups finished in negative territory for the year. The top performing groups for the year were Personal Products (+49.6%), anchored by the strong price performance of Estee Lauder, and Internet Retailing and Direct Marketing (+47.3%), which is driven primarily by the price performance of Amazon.com and Netflix. The worst performing groups were Energy Equipment and Services (-15.1%) and Leisure Products (-12.2%) which is comprised of Hasbro and Mattel.
Earnings per share, for the broader index, are expected to grow 11.4% in 2018 and 10.1% for 2019, according to bottoms-up forecasts provided by Factset. Interestingly, the current estimates are below the levels recorded at the beginning of 2017. Analysts appear to be waiting for company guidance before incorporating tax reform benefits into their models. Consensus forecasts suggest that the new corporate tax rate of 21% could add another 9%-10% of growth to next year’s S&P 500 Index EPS estimate. The fastest earnings growth in 2018 is expected to be generated by the Energy sector, driven by low comparisons and firming oil prices. Materials and Technology are expected to round out the top of the earnings growers list, while Telecom and Utilities are expected to lag. If earnings growth drives sector performance in 2018, the year’s leaders and laggards list could look very similar to 2017.
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