The big story of 2017 may be what didn’t happen for markets. Stocks rose sharply after President Trump’s surprising election victory, and they hardly waivered throughout 2017. The Dow Jones Industrial Average notched 70 record highs in a year in which the S&P 500 gained 22%. While many feared a sharp correction after such a strong run, it never materialized. We addressed concerns about the age of the bull market in the last Recap, concluding that the underlying fundamentals had improved commensurate with much of the rise in the indexes, and therefore stocks were not (and are not) egregiously valued even after a lengthy period of gains. Our view today is very much the same, and our outlook remains constructive for the economy and for stocks.

At Peloton, we analyze the operating results and outlook for each specific company we own, but we must consider the economic and market environment that these companies and their stocks exist in. On many metrics, the economy has entered a very favorable phase. Inflation remains low despite accelerating growth. By most measures, the economy is at “full employment.” Tightness in labor markets will eventually lead to upward pressure on wages, which is good for consumers (70% of the domestic economy). The downside to wage inflation is the negative impact on corporate margins and profits. However, improving regulatory and fiscal outlooks provide significant positive earnings offsets.

In addition to generally more favorable economic conditions, there are aspects of tax reform that benefit specific companies in very tangible ways. Companies that earn the bulk of their profits in the U.S. likely pay a high effective tax rate under current tax law. The new rules will significantly lower their taxes and increase earnings per share – the ultimate driver of stock prices. Similarly, lowering the repatriation tax hurdle will benefit companies with broad international reach who have been holding foreign-earned profits overseas to avoid paying high domestic taxes on profits when brought home. Flexibility to pursue investment opportunities within the U.S. is positive.

We strongly disagree with the repatriation naysayers who argue companies will merely benefit shareholders via buybacks and dividends. (Never mind that the number one job of corporate executives and boards of directors is to benefit shareholders.) To the extent they do return capital to shareholders, much of that money would benefit 401(k) investors, not just the ultra-wealthy. Considerable money would find its way into the real economy. More importantly however is the likelihood that companies will increase capital expenditures and expand operations in the U.S. Long-time Peloton holding and star performer Boeing (NYSE: BA) is a prime example. The company has a backlog of 5,864 planes ordered (worth nearly half a trillion dollars) – seven years of production with existing capacity. If Boeing uses repatriated profits to build additional production facilities (a massive capital and labor investment endeavor), it can deliver more planes faster and increase profits.

Another aspect of the tax reform legislation that gets little attention is a change in the way companies can expense their capital investments. So-called “immediate expensing” of capex, coupled with trillions of dollars of repatriated profits, could lead to the first business investment boom in more than three decades. All of this is positive for economic growth, employment and wages, and ultimately corporate profitability. We expect there to be market pullbacks and corrections, but the underlying fundamentals support stock prices at these levels and it’s quite possible that 2018 could be another good year for stocks.