Market Memo: 5 reasons 2018 should be good for growth strategies

01-30-2018

Client portfolio manager Jordan Stuart explains why the year ahead holds promise for growth investors.

As the new year and new tax law take shape, there’s widespread consensus that the economy and the markets will benefit. Considering the U.S. corporate tax rate went from the highest among G7 countries to the lowest, it would be hard not to see an impact. And when it comes to growth investing, we see five good reasons to expect a continuation of 2017’s strong performance:

1. It is still an earnings-driven market Earnings growth was the primary driver behind the equity resurgence in 2017 following a 3-year lull. We expect the same for 2018. This bodes well for the big earnings-growth sectors like Health Care and Technology.

2. Tax reform Beyond the clear advantages for virtually all companies, the repatriation of trillions of dollars of overseas cash will predominantly benefit growth sectors that have the most cash overseas: again, Health Care and Technology, which according to the Wall Street Journal hold a respective $583 billion and $978 billion of profits overseas. By some estimates, more than half of overseas cash is held in these two sectors. This may be the most underappreciated aspect of the tax bill. It will benefit numerous growth companies with an enormous cash infusion that they can return to invest in their businesses.

3. Moderate growth trajectory for GDP—and inflation The tax bill is focused on getting businesses to invest in the economy. Although expected to deliver strong results over time, these investments likely will take time to be reflected in actual economic output. As a result, a 4% or higher GDP or inflation level is not likely. We expect earnings quality to drive equities higher, benefitting growth stocks.

4. Promising IPO market While the U.S. initial public offering market picked up in 2017, with 163 IPOs—up from 105 in 2016—these levels still were below average. We expect the momentum to pick up this year and see more IPO potential in the larger-cap space where such companies as Spotify, Airbnb, Lyft and Pinterest are expected to go public.

5. Innovation From the accelerating dominance of e-commerce to cloud computing to artificial intelligence to increasing connectivity to life-changing medical breakthroughs yet unknown, the opportunities for strong growth companies focused in these areas are tremendous. Innovation will continue to be a powerful driver for long-term growth.