Siegel: Rising Interest Rates to Clash with Good Earnings in 2018

The markets have seen some major highs so far in 2018, but some experts aren’t convinced the positivity will last.

Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School, told CNBC on Tuesday (April 17) that the year’s current progress will soon “collide” with heightening interest rates.

“It’s going to be a flat to slightly upward tilting year as good earnings collide with what I think will be higher interest rates both by the Fed and in the Treasury market,” he said. “This market is going to struggle this year.”

While Siegel is a long-term bull, he foresees the market struggling under the pressure of the Fed’s plan to shrink Treasury holdings. “3.25 percent on the 10-Year [Treasury] will give stocks a pause in 2018,” Siegel said. Rates as of Monday (April 16) sat near 2.83 percent.

The Dow Jones Industrial Average (INDEXDJX:.DJI) saw incredible growth in 2017, hitting record-smashing highs and surging 25 percent. However, Siegel doesn’t see the trend continuing into this year, and predicts a top stock market gain of 10 percent for 2018.

“These gains that people are talking about — 10 to 15 percent a year this year and maybe next year, I just don’t think they’re going to be realized,” he said.

Siegel elaborated by saying that the current boost some markets are feeling from corporate tax cuts will eventually ebb, and that the economy will notice the effects.

“Firms are actually going to lose depreciation deductions in future years. So, it’s going to be great in 2018,” he said. “2019 — you’re going to have to have a growing economy to generate earnings gains. It’s not going to be anywhere near as easy as it was this year.”

He did, however, emphasize to CNBC that he isn’t trading his bullish perspective in for a bearish outlook.

“I’m not predicting a bear market. Valuations are still very attractive for long-term investors. We’re selling around 18 times this year’s earnings,” Siegel said. “I wouldn’t sell out there.”

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.