Outlook for 2017: Strategists from Vanguard, Fidelity, Franklin Templeton, Ameriprise, BlackRock and others weigh in

Unusual number of variables in the New Year.

Economists make predictions because people ask them to, and the same holds true for market strategists. Here’s a roundup of predictions for 2017 from major fund companies and brokerages.
VANGUARD: JOE DAVIS, CHIEF GLOBAL ECONOMIST, AND TEAM
After several years of suggesting that low economic growth need not equate with poor equity returns, our medium-run outlook for global equities remains guarded in the 5%–7% range. That said, our long-term outlook is not bearish and can even be viewed as positive when adjusted for the low-rate environment. When returns are adjusted for future inflation, we estimate a 50% likelihood that a global equity portfolio will produce a 5% average real return over the decade ending 2026, in contrast with 6.8% per year for 1926–2016. As such, our long-term outlook is not bearish, and can even be viewed as positive when adjusted for the low-interest-rate environment.
FIDELITY INVESTMENTS: JURRIEN TIMMER, DIRECTOR OF GLOBAL MACRO
Despite potential valuation headwinds, I’m bullish on stocks based on where we are in the earnings cycle. But I don’t expect a sudden boom in merger-and-acquisition activity or stock buybacks resulting from foreign cash repatriation by the new administration. Share buybacks are now near levels last seen in 2007, shortly before the financial crisis, but they’ve largely been funded by cheap debt. In 2017, with yields higher and foreign cash coming in, I expect buybacks and M&A to continue on pace, but that the funding will switch from debt to repatriated cash.
While there appear to be good opportunities for growth in 2017, it would be unwise to overlook the enormous amount of uncertainty that overhangs the markets and economy. A new administration is coming in with a very different agenda than the one of the past eight years. Global markets are very nervous about potential trade policies the U.S. may adopt. And it’s unclear how stocks will react to an environment of higher interest rates and potentially higher inflation. We simply don’t know what we don’t know. What does seem clear is that this will not be the “just close your eyes and buy” market that we’ve seen in the past. It’s a more challenging and tactical environment in which there is not only upside potential, but also more downside risks. To me, this kind of regime shift should be an ideal opportunity for active management.
AMERIPRISE: DAVID JOY, CHIEF MARKET STRATEGIST
As we look toward the New Year, we see the potential for somewhat better economic growth and improved earnings, offset to some extent by rising interest rates and tempered by elevated valuations. All of which equates, in our minds, to another year of modestly positive equity prices, with the S&P 500 rising to 2,360 at year-end. That is just 4.5% above Friday’s close. If stocks perform better than that, as they have in 2016, so much the better, as long as we get the direction right.
BLACKROCK INVESTMENT INSTITUTE: RICHARD TURNILL, GLOBAL CHIEF INVESTMENT STRATEGIST
We see developed market equities moving higher in 2017 and prefer dividend growers, financials and health care. We like Japanese and EM equities but see potential trade tensions as a risk.
STATE STREET GLOBAL ADVISORS: MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, US SPDR BUSINESS
Our forecasted return for US large-cap equities is 3% and we see some potential for upside. Therefore, we enter the year with an overweight position. After five consecutive quarters of negative earnings growth for the S&P 500, we expect growth to be modestly positive as we flip to 2017. Fed interest rate increases should benefit financials, boosting interest margins. Materials and industrials could benefit from fiscal stimulus through potential new infrastructure spending. We remain cautious towards international equities with underweight positions in both developed European and Asia Pacific regions. Our underweight to these regions in part reflects a perceived decline in the efficacy of monetary policy support in the Eurozone and Japan.
BAIRD:
Just as stocks have emerged from a cyclical bear market, and the economy has emerged from an 18-month period of persistent downside surprises, the earnings recession has also ended. Earnings grew in the third quarter at the best pace since the final quarter of 2014. Stock funds are finally attracting inflows again and bond funds have started to see outflows. The S&P 500 could reach 2,400 in 2017, but rally prospects are better the first half than the second half.
FRANKLIN TEMPLETON: NORMAN J. BOERSMA, CHIEF INVESTMENT OFFICER, TEMPLETON GLOBAL EQUITY GROUP AND CINDY L. SWEETING, DIRECTOR OF PORTFOLIO MANAGEMENT
In our view, global value stocks look well positioned for the rising inflation, low-interest rate environment we expect in 2017. These conditions can be supportive of value and favorable to investors who actively allocate capital to companies that appear fundamentally mispriced. The sectors we believe are likely to do well are the ones positively correlated with nominal yields, namely the financials, resource-oriented and consumer cyclical sectors that today make up much of the benchmarks for value investments. These are sectors that, in some instances, traded at the widest discount to the rest of the market on record as of mid-November, so we think the scope for potential recovery is material.
BONDS AND FIXED INCOME
PIMCO: JOACHIM FELS, GLOBAL ECONOMIC ADVISOR, ANDREW BALLS, CIO, GLOBAL FIXED INCOME
While our baseline scenario is for ongoing global growth , we remain cautious in our portfolio positioning for several reasons. First, asset markets seem vulnerable to even small negative surprises. Second, we remain concerned about longer-term risks, such as high debt levels, diminishing returns to monetary easing and rising populism. Third, several swing factors could affect the cyclical outlook as well; we are closely watching the three P’s of productivity, (monetary and fiscal) policy and politics.
HENDERSON GLOBAL INVESTORS: JOHN PATTULLO, CO-HEAD OF STRATEGIC FIXED INCOME
We believe there is a possibility that the reflation theme might fade by the middle of next year. This is because we are not convinced, and nor are the strategists that we speak to, that Donald Trump can invigorate the U.S. economy meaningfully to justify the very large price moves that we have seen in both the equity and bond markets. We may go back to the deflationary, secular stagnation themes that were prevalent in the bond markets; or secular stagnation with an extra dose of stagflation, potentially, next year.
Secured loans continue to appeal to us and we have reasonably large allocations to this asset class in the portfolios … We also like U.S. high yield bonds, where we believe company default rates will remain low. Specifically, domestic facing, large, non-cyclical businesses with reasons to exist, that have shorter durations and offer reasonable coupons (interest income).
BLACKROCK INVESTMENT INSTITUTE: RICHARD TURNILL, GLOBAL CHIEF INVESTMENT STRATEGIST
We see reflation taking root and believe global bond yields have bottomed. As a result, we prefer equities over fixed income and credit over government bonds. We see higher yields and steeper curves, and favor short- over long-duration bonds and value shares over bond-like equities. We favor high-quality credit and inflation-linked securities over nominal bonds.
VANGUARD: JOE DAVIS, CHIEF GLOBAL ECONOMIST, AND TEAM
The return outlook for fixed income remains positive yet muted. For example, our “fair value” estimate for the benchmark 10-year U.S. Treasury yield still resides near 2.5%, even with two to three near-term increases in the policy rate. As we stated in 2015, even in a rising-rate environment, duration tilts are not without risks, given global inflation dynamics and our expectations for monetary policy. Recent low volatility and compressed corporate bond spreads point to credit risks outweighing those of duration.
SSGA: MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, US SPDR BUSINESS
Near record-low yields provide a poor starting point for global fixed income markets where an estimated $12 trillion in securities carried negative yields at times in 2016. Without price appreciation from even lower yields, this asset class can only provide negative returns going forward. We remain favorable on U.S. credit and high yield with one-year forecasts of 2% and 5.1%, respectively. We expect credit to continue to outperform government bonds as rates normalize, even as spreads tighten.