Wall Street's biggest bulls see another 10% gain coming in 2018

Key Points
  • Piper Jaffray had a 2,575 full-year target for the S&P 500 this year that the index just recently surpassed.
  • The firm, which has been at the forefront of optimism since the bull market began in 2009, has a 2,850 price target for 2018.
  • Piper sees gridlock, inflation, geopolitical risk, a Chinese economic slowdown, the Federal Reserve falling behind the curve on rates and instability in Europe as main downside risks.
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The powerful 2017 stock market rally will continue through next year even if it slows down just a little, according to a forecast from one of Wall Street's most optimistic strategists.

Piper Jaffray correctly anticipated the current strong market performance, with a 2,575 full-year target for the that the index just recently surpassed.

Looking ahead, the firm sees more of the same.

"We see a favorable backdrop for U.S. equities as market fundamentals suggest the path of least resistance remains higher," strategists Craig Johnson and Adam Turnquist said in a year-ahead preview released Wednesday. "We believe the growth story will continue to drive price action and cut through the day-to-day noise."

Just as the firm has been at the forefront of optimism since the bull market began in 2009, it is taking the lead for the year ahead, with a 2,850 price target for 2018. That represents about a 10 percent gain from Tuesday's closing price.

"As we look ahead to next year, we believe it will continue to be a fundamental storyline with several upside catalysts for stocks on the horizon," the analysts wrote.

In addition to fundamental factors like strong global growth, low interest rates and a mostly friendly political climate, technical factors are at play. For instance, they cite strong market breadth when looking at advancing vs. declining stocks, the solid performance of transportation stocks against the Dow industrials and longer-term indicators of new highs and techniques pointing to more upside.

Manageable downside risks

The forecast comes as the S&P 500 has rallied 16 percent in 2017 and the Dow has surged more than 30 percent since Donald Trump was elected a year ago. The president's pro-growth agenda of tax reform, regulatory rollbacks and infrastructure spending has helped drive market sentiment even as Congress has been slow to take action on the plans.

Indeed, Piper Jaffray acknowledges the potential for gridlock as a downside risk to its forecast. Other issues that could cloud the year include inflation, geopolitical risk, a Chinese economic slowdown, the Federal Reserve falling behind the curve on rates and instability in Europe.

Though consistently over-optimistic, Piper has had a pretty good record in recent years, calling for 2,350 in 2016 compared with the actual 2,275 and 2,100 in 2014 versus the actual 2,028. Its worst year in the past five came in 2015, when it also had called for a 2,350 finish, well ahead of the actual 1,918.

As for 2018, the firm believes there are more positive factors that even could outweigh legislative issues in Congress.

"Geopolitical risk and Washington drama have done little to distract the bulls although tax reform has recently made progress," the strategists said. "Wrinkles still need to be ironed out within the bill and we believe it is far from being priced into the market. We also do not see tax reform as a requirement for stocks to advance and view it more as a free call option within the context of a growing economy."

Wall Street pros have been warning about a looming correction for months, particularly considering the market hasn't seen even a 2 percent decline in 60 weeks.

However, a drop in the market now could prevent an opportunity. Piper said that in the six other instances where the market went more than 50 weeks without falling 2 percent, when the decline did come it was most often followed by gains — average returns of 12 percent over the next 52-week period.

The market also is currently on a seven-month winning streak, something that also has traditionally led to gains after a pullback, the note said.

"With the data suggesting a bias toward positive future returns, we believe more upside lies ahead for the broader market and recommend investors welcome any-near term weakness as a buying opportunity," Piper said.

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