We think one of drivers of US equity markets in 2017 will be corporate earnings — how much earnings improve, and how earnings are reinvested. Since 2011, corporate profitability has been relatively weak or negative (see chart). In addition, companies have either been hoarding cash on their balance sheets or engaging in activities that do not result in higher productivity, such as buying back company stock. However, we expect this environment could change in the coming year.

After declining for more than a year, the earnings of the S&P 500 companies resumed growth during the 3rd quarter of 2016, and they’re on track to post growth for the 4th quarter as well. In 2017, US corporate profits could get a boost from the pro-business policies proposed by the Trump administration, including lower US corporate taxes and regulatory reform.

However, there’s a lot that could hamper earnings growth in 2017, including restrictive trade policies, a stronger US dollar, and rising interest rates and inflation. We believe the market has yet to price in these risks to profitability.

As we get further along in 2017, our focus will also be on how companies are putting their earnings to work. Ideally, we would like to see corporations reinvesting their earnings in technology, new plants and new markets, all of which could boost productivity. Whether this will actually happen remains in question. We have also highlighted four other drivers of market returns in our Q1 2017 Economic Outlook.