Stretched valuations, over-optimism on U.S. tax plan could weigh on S&P 500

Investors hoping this bull market will get juiced even further in 2018 may be setting themselves up for disappointment.

That’s according to strategists at Société Générale, who released their equity outlook for the coming year on Thursday.

“We expect stretched valuations and rising bond yields to limit equity index performances in 2018 and the prospect of a U.S. economic slowdown in 2020 to further cramp returns in 2019,” said a team led by Roland Kaloyan, head of European equity strategy.

They describe upside potential for the S&P 500 index SPX, -0.08% , which has enjoyed a 16% run higher this year so far, as “limited,” saying a rebound for growth and inflation has already been priced in.

They predict the index will finish next year at around 2,500, which would mean little or no progress against current levels in a year that has delivered more than 50 record closes.

Noting one headwind to a move higher, Kaloyan and the team said U.S. equities haven’t looked like a bargain for a while.

“Indeed, on all the main valuation metrics, U.S. equities are trading above their long-term average and at a level only seen during the dot-com bubble,” they said.

In addition, they noted that at 12%, the expected 12-month growth for earnings is below the 20-year average of 14%.

The Société Générale team said any increase in bond yields will “push the equity market further into expensive territory relative to bonds.” If the yield on the 10-year U.S. Treasury bond TMUBMUSD10Y, +1.15% hits 2.7% by the end of 2018, that could cause stocks to stumble, they said.

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