Financial markets have surged in the early weeks of 2018 on the heels of a historic tax reform package passed by the U.S. Congress in December, but lower taxes aren’t necessarily causing rising stock indexes.

In Envestnet’s 2018 Market Outlook, broadcast last week, three investment strategists argued that the markets weren’t fully pricing in the impacts of tax reform – or hadn’t yet priced them in at all.

“Tax reform has not been a big factor driving equities higher,” said Talley Léger, equity strategist at OppenheimerFunds. “If it were, you would expect to see small-cap equities outperforming, but they aren’t. The markets were already set to move higher before tax reform … these pre-existing conditions of strong, synchronized global economic growth, financial conditions, monetary outlook and low inflation (have been driving equities higher).”

Lower corporate and individual taxes could have little impact on financial markets, said Léger, as fiscal policy historically tends to be blunted by monetary policy, or vice-versa, producing little net effect on investors. Yet additional fiscal stimulus, in the form of an infrastructure package, may be coming this year.

Brandon Thomas, Envestnet’s chief investment officer, argues that the market may not have discounted some of the tax reform’s impacts, like the repatriation of corporate assets held abroad and anticipated wage increases -- some recently announced from major employers like Wal-Mart  -- may play out over a longer period of time.

“It seems that much of the market’s rise over the last several months has been partly due to the anticipation of the effects of tax reform,” said Thomas. “What happens from here forward remains to be seen as cash from overseas is repatriated.”

Over the longer term, investors should also keep an eye on spending, as tax reform already promises to increase deficits and further run up the national debt, said Christopher Molumphy, chief investment officer, fixed income group, at Franklin Templeton Investments.

“I would urge you to keep an eye on what we see coming out of the government this year, our sense is that there will be a fair amount of spending coming out of both parties,which would pressure the U..S. debt on the margin,” said Molumphy.

Molumphy said that the fundamental underpinnings of global fixed-income markets remain strong, and opportunities abound for bond investors willing to look abroad.

The U.S. grew at about 2 percent  last year, said Molumphy, who expects 2.5 percent GDP growth in 2018. Nevertheless, he also noted the end of the U.S. bull market in bonds.

“The bull market in fixed income has ended, it actually ended a year and a half ago going back roughly to the summer of 2016,” said Molumphy. “Interest rates are up roughly 100 basis points over the last year and a half … the question now is where do rates go from here.”

All three of the panelists argued that global growth creates a more compelling story across asset classes, especially as the U.S. bull market in equities continues to age.

“The ride isn’t over yet, but we’re getting closer,” said Léger. “We’re eight to nine years into the expansion and the bull run in U.S. stocks, we’ve enjoyed some pretty fantastic gains in U.S. equities off the 2009 lows… but the byproduct of all this is that valuations have become stretched.”

Léger noted that this is the second longest bull market in U.S. history. It’s not that the market is hostile to domestic stocks, but that the environment is less friendly than it had once been, according to Léger.

Oppenheimer is encouraging investors to look for opportunities in overseas markets.

“Until months ago, they did not participate on the upside, and so their valuations are compressed,” said Léger. “we find compelling value in regions like emerging markets and Europe.”

Global market momentum is not just driven by growth, but by continued accommodative monetary policies. Though central bankers in Europe, the U.S. and the United Kingdom have indicated that they will gradually tighten monetary policy and shrink their balance sheets; as a whole interest rates and quantitative easing should continue to support equity valuations, said Léger.

Thomas looked at the markets through a factor prism, taking into consideration six academically supported, persistent, statistically robust and investable factors: market beta, size/market capitalization, value, momentum, quality/profitability and volatility/beta sensitivity.

“Factor performance was mixed in 2017 -- in some years, all factors work in concert, in other years no factor performs particularly well, but rarely to you see a year where every factor is out of favor,” said Thomas. “The top performer was momentum -- there was a low volatility environment where stocks posted strong gains with minimal drawdown, and stocks that won in the past continued to well.”

Quality stocks from profitable companies also outperformed in 2017, while small-cap and value stocks underperformed their larger-cap, higher-valuation counterparts, said Thomas.

The outlook for factor performance this year largely depends on an investor’s outlook on equity and fixed income markets in general, said Thomas.

“If stocks will march higher, perhaps momentum and quality would continue to perform well, but if volatility increases, low volatility and quality could be expected to perform better,” said Thomas. “Value should also do well when the market becomes more volatile.”

In the early weeks of 2018, the value factor is inexpensive to access, said Thomas, but there’s not much on the horizon to suggest that the performance of value stocks will rebound sharply. Yet Thomas said that small-cap value stocks are due for better performance in the near term. While small-cap value stocks have been the best-performing corner of the traditional style box for decades, they have been the worst-performing stocks over the past five years.

Thomas also warned that the S&P 500 was due for a correction at some point this calendar year, though U.S. stock indexes might still end up in positive territory -- but the other presenters disagreed.

“A structural wave of runaway inflation could derail the markets, but we’re not seeing that,” said Léger. “This week we saw deceleration in the U.S. in import prices and producer prices, that underscores this concept that  inflation trends will remain subdued.”

A sudden change in monetary policy outlook could also shock financial markets, said Légere, or tighter monetary conditions.

Léger also felt that a global recession could be caused by some sort of major disruption to the U.S. or Chinese economies, but emphasized that there was no sign of one. “This market has virtually dragged investors kicking and screaming to a new high, and equity inflows have lagged fixed-income inflows,” said Léger. “We’re not seeing signs of euphoria yet; fundamentals remain at their best levels since the financial crisis.”

Though monetary tightening by the U.S. reserve is causing the yield curve to flatten, where the interest rates on short-term debt begin to approach the rates on long-term debt, and the yield curve may actually invert later in 2018, interest rates do not necessarily signal an impending recession. This time might really be different, said Molumphy.

“If you look historically, yield curves tend to invert right before recessions, that’s the theory,” said Molumphy. “What’s different about this environment is the unprecedented purchasing of longer-term bonds globally, which will continue to result in the long-term rates being lower than they should be based on pure fundamentals. That’s not going to go away any time soon over the next 12-to-18-to-24 months. The shape of the yield curve may be different than it has been historically.”