Another Great Year Ahead for Stocks

December 2nd Weekly Market Update

Stock market investors should be rooting for low single-digit economic growth next year — and the reason why has nothing to do with the Federal Reserve (Fed).

 We forecast a low double-digit gain of 10 – 15% for U.S. stocks in 2014, as measured by the S&P 500 Index. This forecast for a slightly above-average annual return is rooted in our expectations for high single-digit earnings growth and a modest rise in the price-to-earnings (PE) ratio. An improvement in economic growth to an average 3% pace in 2014 should drive solid profit gains and boost confidence in the durability of growth.

Contrary to conventional wisdom, and what may be a surprise to those who see low single-digit rates of gross domestic product (GDP) growth as incompatible with solid double-digit stock market gains, GDP does not have to be booming to produce solid gains in the stock market — as 2013 can attest. In fact, there is little relationship between the magnitude of GDP growth and stock market performance.

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