With the S&P 500 climbing nearly 20% during 2017, traders are wondering what’s in store for 2018. We anticipate it’s going to be more of the same.
But to understand why you’ve got to dig down into the various sectors that make up the S&P 500 to see the trends that are likely to drive continued growth in the stock market.
The comparison chart representing relative performance during 2017 in Fig. 1 contains a candlestick chart of the S&P 500 and line charts of the following exchange-traded funds (ETFs) representing the nine different sectors within the S&P 500:
- Consumer Discretionary (NYSEARCA:XLY) — red line
- Consumer Staples (NYSEARCA:XLP) — orange line
- Energy (NYSEARCA:XLE) — yellow line
- Financials (NYSEARCA:XLF) — light blue line
- Health Care (NYSEARCA:XLV) — brown line
- Industrials (NYSEARCA:XLI) — dark green line
- Materials (NYSEARCA:XLB) — light green line
- Technology (NYSEARCA:XLK) — dark blue line
- Utilities (NYSEARCA:XLU) — pink line
Fig. 1 — 2017 Comparison Chart of the S&P 500 and its Component Sectors
As you can see, the Technology sector was the top performer — up nearly 33% on the year –and the Energy sector was the bottom performer — down nearly 9% — with the other sectors clumping together in a relatively tight range.
We expect many of these trends to continue, but four, in particular, jump out at us, and we’ve highlighted them with green and red arrows. Let’s take a look.
Technology to Continue Higher
The Technology sector has been the clear winner during 2017, and we expect it to be a top-performing sector once again in 2018 thanks to the tax-reform bill that Congress has passed.
Looking at the top-10 holdings in XLK in Fig. 2, we expect companies like Apple Inc. (NASDAQ:AAPL ) and Microsoft Corporation (NASDAQ:MSFT ) to use their tax savings and the repatriation of their overseas funds to continue their massive share-buyback programs.
We also expect companies like AT&T Inc. (NYSE:T) and Verizon Communications, Inc. (NYSE:VZ) to enjoy the benefits of seeing their effective tax rates drop from the low 30% range to 21% and we expect companies like Intel Corporation (NASDAQ:INTC) and Cisco Systems, Inc. (NASDAQ:CSCO ) to see increased revenue as companies use the portion of their tax savings that won’t be plowed into share-buybacks and dividend increases to invest in technology upgrades.
Fig. 2 — Top-10 Holdings in the Technology Select Sector SPDR ETF
Financials to Continue Higher
After experiencing a remarkably bullish end to 2016 in the aftermath of the presidential election, the Financial sector turned out to be somewhat of a laggard during the first two-thirds of 2017.
That all changed, however, when Congress cleared the way to start working on tax reform when it came back from its Labor Day holiday. Since that time XLF has been one of the top-performing sectors, and we expect that trend to roll on into 2018.
Tax reform should boost banks’ bottom-line earnings by cutting the amount of taxes the banks themselves will have to pay, but it is also likely to increase trading volumes and merger and acquisition (M&A) activity.
Plus, even though the yield curve has been flattening a bit, net interest margin levels have been increasing for U.S. banks (see Fig. 3).
Fig. 3 — Net Interest Margin (source St. Louis Fed FRED)
This increase should go a long way toward boosting banks’ revenues.
Energy to Continue Higher
The most disappointing sector in early 2017 was Energy. With oil prices falling during the first part of the year, energy stocks had no chance to rise. However, once oil prices started to climb halfway through the year, energy stocks started to recover.
We expect OPEC’s extension of its oil-production cap through the end of 2018 and the strong economic growth we are seeing not only here in the United States but also around the globe to continue pushing oil prices higher in 2018 (see Fig. 4).
Fig. 4 — Daily Chart of Crude Oil
Utilities to Continue Lower
Utilities usually come into favor as an investment choice when traders are looking for additional security and stability in their portfolios and when interest rates are low. Unfortunately for utilities stocks, traders seem to be quite confident in the bullish potential in the market, and interest rates are starting to rise.
Looking at the chart of the CBOE 10-Year Treasury yield in Fig. 5, you can see that after bottoming out in early September, Treasury yields are on the rise, which makes the dividend yield on utilities stocks look less appealing, forcing dividend-stock prices lower.
Fig. 5 — Daily Chart of CBOE 10-Year Treasury Yield (TNX)
If the Trump administration actually does move forward with an infrastructure-spending proposal in 2018, watch for Treasury yields to move even higher in anticipation of increased infrastructure-induced inflation.
We’ve got a few days left in 2017, and it looks like the market is going to close out the year on a high. We expect more of the same in 2018.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade with our $19 for 2 months Holiday Savings Special by clicking here.
