2018 Outlook Part I: Back to Normal

"Your future is whatever you make it. So make it a good one." — “Doc” Brown

Emmet Lathrop “Doc” Brown, PhD, was a fictional character from the "Back to the Future" trilogy, first released in 1985. Dr. Brown was a self-professed “student of all sciences” and invented the first time machine out of a DeLorean sports car. Christopher Lloyd portrayed the character in the films.

Executive Summary

Our overall theme for 2018 is a return to normalized monetary and other policy. Following the financial crisis and Great Recession, the Federal Reserve (Fed) used extraordinary measures to assist the economy and markets. Coincidentally, and appropriately in our view, is that according to the Chinese Zodiac, 2018 is the year of the dog, an animal associated with integrity and loyalty.

2017 has been a year full of headlines: global politics, tensions flaring in the Middle East, and a new U.S. presidential administration dominated the news. The financial markets have focused on shifting monetary policy as the Fed continued to raise interest rates and markets began anticipating the eventual start to tapering of the Fed’s balance sheet.

We witnessed many tragedies this year, and our hearts go out to the families of the victims. A particularly severe hurricane season affected many throughout Florida, Texas, Puerto Rico, and other U.S. territories, and sever al devastating fires burned through California.

We expect the Fed to continue to raise rates gradually in 2018. PNC expects three interest rateincreases next year, each at 25 basis points. We will be watching the change in leadership at the Fed, as current Chair Janet Yellen is succeeded by newly nominated Jerome Powell, who will assume office in February 2018 pending Senate confirmation. We expect earnings growth in 2017 to be in the upper-single-digit range for the S&P 500®, a number we revised higher in the third quarter owing to better-than-expected results from companies. For 2018 we are expecting another solid year for earnings growth, and our PNC estimate for S&P 500 earnings is in the mid- to upper-single-digit range. Our forecast for 2018 earnings is outlined in this Investment Outlook.

PNC expects the economic expansion to continue through the end of this year and into 2018, forecasting 2.3% growth this year and 2.7% for 2018. The job market should be close to full employment later this year; job and wage gains are helping boost personal incomes; consumer spending should continue to lead economic growth; and the housing market will probably continue to gradually recover. The short-term impact from the hurricanes is likely to be offset by rebuilding efforts in late 2017 and early 2018.

We expect markets to continue to watch the Fed and other central banks worldwide for shifts in monetary policy. Movements in inflation and currencies are key factors to watch this year. We believe unforeseen outcomes in global politics could continue to surprise.

While we acknowledge the difficulty for us, or anyone, to predict with great accuracy the short-term behavior of stocks, we feel investors should continue to focus on their long-term goals, working with their PNC advisors to develop an asset allocation that matches their risk and return objectives.

PNC’s six traditional asset allocation profiles are shown on the back page of this outlook.

For more information, please contact your PNC Advisor or call 888-762-7226 to request an appointment with a PNC Wealth Management Professional.

Amanda E. Agati, CFA®
Institutional Chief Investment Strategist

Jeffrey D. Mills
Hawthorn Chief Investment Strategist

Bill Stone, CFA, CMT
Wealth Management Chief Investment Strategist

Travis E. Dragan, CFA, FRM
Senior Fixed Income Strategist

Chen He, CFA
Senior Portfolio Strategist

Marsella Martino
Senior Investment Strategist

Rebekah M. McCahan
Investment Strategist

Paul J. White, PhD, CAIA®
Senior Portfolio Strategist

Michael Zoller
Investment Strategist

For more information, please contact your PNC Advisor or call 888-762-7226 to request an appointment with a PNC Wealth Management Professional.

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