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Can S&P 500 still deliver double digit gains this year?

Stock market surge

Nobody can say the stock market outlook these days isn't looking cloudy, but most investors appear to remain sunny. That in itself should be a moderately bullish sign, although nothing is certain, to be sure.

"As we look to the second quarter and beyond, our crystal ball is as cloudy as ever when it comes to predicting short-term market movements, but we remain optimistic and think that double-digit percentage returns for the full year are achievable," said John Buckingham, chief investment officer at Al Frank Asset Management, which has $1.5 billion under management. 

He cautions, however, that investors have to be realistic about ongoing geopolitical issues as well as negative political catalysts in the U.S. that have been exacerbated by President Trump's firing last week of FBI Director James Comey, plus the fact that the markets haven't suffered much in the way of a pullback since the robust rally after the presidential election. 

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Part of the market's relatively calm behavior can be seen in significantly reduced measures of volatility, even after the market's major indexes have jumped to new all-time highs. "While many investors breathed a sigh of relief as a result of the S&P 500's new high that was just shy of the 2,400 level, the more important focus should be on the continued absence of volatility," argued Sam Stovall, chief investment strategist at CFRA, the research unit of S&P Global. 

"If it remains subdued, the S&P 500 has an excellent chance of recording a double-digit gain this year," pointed out Stovall. Year to date, the S&P 500 experienced only three days in which it rose or fell in price by 1% or more. He noted that since 1950, the S&P 500 index averaged such swings 4.25 times per month, or 51 per year. However, at that pace, said Stovall, 2017 should see fewer than 10 in total. Is such a low number of 1%-plus days something to worry about or something to be thankful for?

"If history is any guide, a low frequency of volatility actually hints at a double-digit price return for this calendar year, and a very high likelihood of posting another up year," Stovall said. 

In other words, should 2017 continue to be a low volatility year, (meaning if it records 20 days or fewer of 1%-plus volatility) "hold on to your hats as the S&P 500 will have a very high likelihood (91%) of posting an up year -- with an average annual gain of being above 18%," said Stovall.

But what happens if volatility comes swinging back? "We are braced for an inevitable pick-up in market volatility, but we see no reason to alter our bullish long-term view," said Buckingham of Al Frank. Looking at the market's fundamentals, "interest rates remain extraordinarily low by historical standards, justifying elevated valuation multiples and adding to the appeal of the income offered by equities," Buckingham emphasized. The Federal Reserve has stated that it will maintain "an accommodative monetary stance for the foreseeable future," he added.

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At the CFRA, the advice from Sam Stovall is for investors to overweight portfolios with shares from the industrial and material sectors. 

In the industrial sector, Cummins is one of the stocks that CFRA recommends. Cummins makes and distributes diesel and natural gas engines and engines-related components worldwide. CFRA equity analyst James Corridore recently upgraded his rating on Cummins to a "strong buy" from a "buy," and also increased his price target to $200 a share from $166. 

The upgrades are based on his increased earnings forecast for 2017 and 2018. For 2017, Corridore raised his estimate to $9.75 a share from $8.07, and his 2018 projection to $11 a share from $9.06. Corridore noted that management expects better construction and mining demand, which the analyst believes will persist.

In the materials sectors, PPG Industries is highly recommended by J.P. Morgan Securities as a "good long-term investment."

Jeffrey J. Zekauskas, equity analyst at J.P Morgan, says that PPG, which makes coatings, specialty materials and glass products, has a large exposure in Europe where coating companies generally have moved through a period of negative pricing but are now entering a period in which prices are starting to rise to offset higher raw material costs. 

A focused industrial and consumer coatings company, PPG is well positioned because of favorable end market demand and business integration benefits, as well as the existence of acquisition opportunities.

Currently trading at $110 a share, "we find PPG to be a good free cash flow generator," said Zekauskas, which should be augmented by expanding margins at its "performance coating" business due to the expanding, favorable North American housing trends and moderation in raw material costs.

At CFRA, equity analyst C. Muir has raised the price target for PPG's stock by $4 a share to $122, based on "higher peer valuation."