The end of Friday trading was certainly interesting as the last thirty minutes of the trading day incurred most of the day’s half of a percent loss. A few Twitter posts I read were comments in the vein of “this is the selling I have been anticipating.” The market is overdue for a pullback.

Although the first day of January is simply another day on the calendar, much is made of the fact it is January and a new year. So what is to be expected from the equity market in 2018?

I will admit that top of mind is the fact the S&P 500 Index has not had a double digit pullback since early 2016, nearly two years ago. The market will experience one of these, probably sooner than later; however, I am reminded of the quote made by Peter Lynch,

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Investor should remember that strong equity market returns tend to cluster and run together in a multi year fashion as can be seen below.

A part of the reason positive returning years tend to cluster is the fact the market ultimately trades on fundamentals, both economic and business. One strong and important fundamental with this current market cycle is an improving earnings growth picture. After the weak earnings environment in 2015 and early 2016 resulting from the contraction in energy prices and a currency headwind due to a strong dollar, the February 2016 market bottom coincided with a return to strong earnings growth. This past year will likely see S&P 500 earnings growth of a low double digit percentage rate and projected 2018 forward earnings growth of low double digit rate again.

And there is a lot of truth to the fact that stock prices tend to follow earnings as seen in the below chart. If earnings growth is near a low double digit pace in 2018, and tax reform is a tailwind, equity market returns could be strong in 2018.