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– December 14, 2016

Recent stock gains reflect high expectations for the year ahead.
Like consumer sentiment, U.S. equities are up since the presidential election. The S&P 500 index has risen about 3 percent, or 67 points, since election day, Nov. 8. While some of that reflects emotion, steady improvement in the underlying economy has contributed. For example, the latest employment report shows that 178,000 new jobs were created in November, helping to push the unemployment rate down to 4.6 percent, the lowest since 2007. Other data show improving trends in overall personal income, consumer sentiment, retail spending, and housing, to name a few.

These favorable trends in the economic data are reflected in improving expectations for topline growth for the Standard & Poor’s Composite Index of 500 Stocks (Chart 5). Expectations have risen recently for S&P 500 sales per share over the next 12 months. Current estimates, according to FactSet Research, show sales per share for the S&P 500 are expected to rise 5.2 percent over the coming year. This compares with 2.5 percent growth in actual sales per share over the trailing 12 months through November 2016. Growing optimism about future topline growth is one important support for recent gains in the S&P 500 price index.

For the S&P 500 overall, sales in the fourth quarter rose 2.7 percent (with 99.2 percent of companies reporting). Among the 11 economic sectors of the S&P 500, sales growth was positive for nine. The two declines were in energy and materials. They contributed a net loss of -1.41 percentage points to overall sales growth. That implies that the remaining sectors posted sales growth of around 4.2 percent, close to the long-term average.

The top-performing sectors include consumer discretionary stocks (up 7.9 percent and consistent with our view that consumers are driving economic growth), health care (up 7.1 percent), and the newly created real estate sector (up 6.7 percent). Industrials-sector sales rose 1.3 percent in the third quarter. Within the industrials, capital-goods sales rose 1.1 percent in the third quarter, led by building products and industrial conglomerates, while electrical equipment makers and machinery makers trailed.

Among the capital-goods companies in the S&P 500, a similar trend has occurred, though the growth has not been as robust as the overall index. Sales-per-share growth is expected to be only 0.3 percent over the next 12 months (Chart 6), but that is an improvement over the 4.5 percent decline that was expected last year. In fact, actual performance for capital-goods companies is outpacing the broader index, as trailing 12-month sales per share are up 4.9 percent through November 2016.

Overall, improving economic activity, consistent with the gains in our Leaders index, points to a positive environment for U.S. equity fundamentals over the months ahead.

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