Investors should take a positive view on stocks, while remaining cautious that inflation could pick up too quickly, JPMorgan Asset Management strategists said.
"Overall, we're really optimistic on the outlook. (If) we overdo the stimulus, the economy overheats and the Fed, as usual, reacts too late," then a traditional boom-bust market could about in 2018, David Kelly, chief global strategist at JPMorgan Asset Management, said Tuesday at a media briefing. "The biggest risk is we overheat and over-tighten."
"So long as rates move up slowly, the Fed raises rates slowly, the bull market continues on," he said.
U.S. stocks have soared to record highs since U.S. President-elect Donald Trump, promising tax cuts and infrastructure spending, won the November election.
Meanwhile, the Federal Reserve is almost certain to raise interest rates in December. A tighter monetary policy would move the Fed further away from the very easy policy that many say has kept stocks artificially elevated.
Next year, "the biggest change for the stock market is going to be transitioning from a liquidity-driven regime to a growth-driven regime," David Lebovitz, vice president and global market strategist at JPMorgan Asset Management, said at the same Tuesday panel.
"You'll see the Fed policy play gradually less and less of a role (in the stock market), the further we get away from" zero percent interest rates, he said. "What I think is particularly important, though, is what ends up being signaled. The Fed needs to signal they need to be gradual."
The challenge for the central bank is to support economic growth without letting prices rise too rapidly.
JPMorgan's Kelly expects inflation to reach the Fed's 2-percent target early next year.
The strategists also prefer stocks over bonds, and said more volatility should come as the market looks at earnings and economic data for confirmation that growth isn't just a spoken promise.
The U.S. economy has been in slow recovery since the financial crisis. The second estimate on third-quarter U.S. gross domestic product came in above expectations at a 3.2 percent annual rate on Tuesday, and next year Kelly expects growth to hold steady between 2.5 to 3 percent.
In the long run, "the U.S. is almost out of room to grow," Kelly said. "People need to be invested in places around the world."
Correction: This story has been updated to reflect that Tuesday's third-quarter GDP report was the second estimate.