- We enter the new year with caution in U.S. sectors
where valuations may have been stretched by the fourth-quarter rally.
- Developed non-U.S. markets may continue to strengthen if earnings momentum builds and political change proves less dire than feared.
- For U.S. corporations, the earnings picture has brightened, and we believe profit growth can continue in 2017.
Closing a year that began painfully for equity investors, the final quarter of 2016 delivered some pleasant surprises. The market advance that started in the third quarter continued through the end of the year, interrupted by a few brief downturns. In the aftermath of the U.S. presidential election, U.S. equity performance soared in anticipation of a new business-friendly administration. Major U.S. equity indexes hit record highs and delivered solid positive returns for the year. Outside the United States, most equity markets performed well despite concerns about China's growth trajectory, the future of a post-Brexit U.K. economy, and potential political shifts from a growing populist movement in Europe.
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