As 2018 comes to a close, investors are turning their attention to the market outlook for 2019. And Wall Street’s top strategists are offering some guidance.
The equity strategists followed by Yahoo Finance see a wide range of outcomes in 2019 as the bull market approaches its 10th anniversary. On the low end, we have Morgan Stanley’s Mike Wilson who sees the S&P 500 (^GSPC) essentially going sideways and ending 2019 at 2,750. On the bullish side is Credit Suisse’s Jonathan Golub, who sees multiple expansion sending the S&P to 3,350.
Here’s a summary of what Wall Street’s top strategists are telling their clients.
Morgan Stanley (Target: 2,750; EPS: $176) – Beware tightening financial conditions and decelerating growth.
(Price target as of December 17)
Michael Wilson, Morgan Stanley’s chief equity strategist, thinks stocks will continue struggling next year. He offered a baseline S&P 500 target for 2019 roughly unchanged from his prediction for stocks’ performance at the end of this year.
“After a roller coaster ride in 2018 driven by tighter financial conditions and peaking growth, we expect another range-bound year driven by disappointing earnings and a Fed that pauses,” Wilson wrote. “Valuation should be key factor in stock selection.”
At the core of Wilson’s view is concern of an impending earnings recession next year as continued tightening financial conditions and decelerating growth weigh on corporate profits. Two years of strong earnings buoyed by topline growth, margin expansion and a boost from lower taxes in 2018 “will be hard to replicate next year,” he noted.
Wilson previously pointed to weak earnings results in equities this year as a contributing factor to a “rolling bear market,” with the forward price-earnings multiple for the S&P 500 falling 18% at the end of October from its peak in December 2017. “The bad news is that with a narrow P/E range combined with what is likely to be stagnant 2019 EPS forecasts means we are in for a choppy ride until those numbers fully adjust or there is a shock (positive or negative) that allows multiples to expand or contract more significantly than our forecast,” he added.
Morgan Stanley’s base case price target for the S&P 500 is 2,750 for 2019, with a bull and bear case of 3,000 and 2,400, respectively. The firm anticipates the S&P 500 will trade within a range of 2,650 to 2,800 by the end of 2018.
“Continued tightening of financial conditions and decelerating growth that weighs on earnings will limit index level upside,” Wilson wrote. “We see a material slowdown in earnings growth coming next year, but recognize that until evidence is in hand and earnings revisions begin falling, the market could temporarily overshoot our base case target on valuation and price.”
Bank of America (Target: 2,900; EPS: $170) – ‘Wildcards’ will make for more volatility.
(Price target as of November 20)
The stock market may go up before it goes down in 2019, according to Bank of America Merrill Lynch chief U.S. equity strategist Savita Subramanian.
According to Bank of America, the S&P 500 will drop to 2,900 at the end of 2019 from 3,000 at the end of this year.
Subramanian’s bearish outlook is based on the flurry of “wildcards” that have recently dominated the macroeconomic landscape, including concerns of trade, geopolitics, a widening federal deficit, increased Federal Reserve tightening and an upward bias for volatility in equity markets. Additional harbingers include the peak in homebuilders about a year ago – which tends to lead equities by about two years – and Bank of America’s projected widening in credit spreads in 2019, which have also historically flashed a warning sign to risk assets including stocks.
“Cash is now competitive and will likely grow more so. Cash yields today are higher than dividend yields for 60% of the S&P 500 today, and our Fed call puts short rates close to 3.5% by the end of 2019, well above the S&P 500’s 1.9% dividend yield,” Subramanian said. “We suspect that we see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now.”
Jefferies (Target: 2,900; EPS: $173) – It’s a ‘mature, not end of, cycle.’
(Price target as of December 9)
“Jefferies does not expect a recession in 2019 but the US yield curve is close to inverting just as earnings growth moderates, forcing a trade-off between equity and bond valuations,” Jefferies Sean Darby said. “The Fed’s balance sheet normalization implies an increasing competition for capital favoring Quality. Equally, widening credit spreads will mean higher equity volatility, underwriting companies with net cash and high FCF yield. Our 2019 strategy reflects a mature, not end of, cycle.
“On the one hand, a poor earnings base effect (FY19 8.7% vs FY18 20.9% y-y), real interest rates flirting around positive territory and a strong dollar look set to act as headwinds, but resilient pricing power, stable margins and improving DuPont ratios should put a floor on share prices.”
Oppenheimer (Target: 2,960; EPS: $175) – Negative sentiment is ‘setting the stage for upward surprises’
(Price target as of December 31)
John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said he believes the significant drawdown in stock prices in December 2018 was primarily driven by technical factor and algorithmic trading as opposed to deteriorating economic or corporate fundamentals.
“With the last Fed decision of the year behind us and the market having gone through a dramatic pullback since, we believe that barring an appearance of a ‘black swan’ event, or the shock of a bolt from the blue, the worst of the declines experienced by stocks in 2018 are behind us,” Stoltzfus wrote in a note.
In fact, “increasingly negative sentiment” in the wake of the fourth-quarter 2018 equity drawback may be “setting the stage for upward surprises in 2019, with a reset in valuations and the potential for better-than-expected fundamentals and attractive risk/reward opportunity set for global equities,” Stoltzfus said.
“With what we believe to be almost all but the kitchen sink priced into current valuations, we see opportunity for multiples to return to levels seen at the end of the third quarter” – or 16.9 times forward earnings for the S&P 500 – “with multiple expansions resulting in a global equity rebound in the coming year.”
U.S. dollar banknotes are seen through a printed stock graph in this illustration taken February 7, 2018. REUTERS/Dado Ruvic/Illustration
Stoltzfus foresees 11.5% earnings growth in 2019, with the increase driven by strength in consumer spending, wage growth, cost-cutting and share buybacks. This would come even as the one-time boost from tax reform in 2018 fades for corporations heading into 2019, he said.
He outlined several potential positive catalysts for the stock market heading into 2019, including material progress in trade talks with China, positive surprises in fourth-quarter corporate earnings and better communication from the Federal Reserve.
All things considered, Stoltzfus initiated a 2019 price target for the S&P 500 at 2,960, or 16.9 times his next-year earnings per share estimate of $175. His price target reflects about 19% upside from closing prices on December 28.
Goldman Sachs (Target: 3,000; EPS: $173) – Get defensive.
“A higher U.S. equity market, a lower recommended allocation to stocks and a shift to higher quality companies summarizes our forecast for 2019,” Kostin said. He characterized “high quality” stocks as those carrying strong balance sheets, stable sales growth, low EBIT deviation, high return on equity and low drawdown experience.
Kostin foresees a modest single-digit absolute return of 7% in 2019 for the S&P 500, with the risk-adjusted return less than half the long-term average at 0.5 versus 1.1. The result is that “cash will represent a competitive asset class to stocks for the first time in many years,” Kostin said.
Goldman Sachs has three main scenario predictions for the market in 2019. A base case, which the analysts predict has a 50% probability occurring, involves the S&P 500 rising 5% to 3,000 from 2,850 at the end of 2018. The firm considers a bear case the second most likely outcome, which carries a 30% probability and foresees the S&P 500 falling to 2,500 at the end of 2019 on fears of a likely recession in 2020. Finally, Goldman Sachs ranks the bull case the least likely scenario with a 20% of playing out, with the S&P 500 closing 2019 at 3,400.
Barclays (Target 3,000; EPS $176) – Growth will revert to trend.
(Price target as of November 19)
Economic and earnings growth will revert to the trend in 2019 after the 2018 bump fades, according to Barclays analyst Maneesh Deshpande.
“Strong 2018 economic/earnings growth was driven by fiscal stimulus, a rebound from 2016 mini-industrial recession and front loading of trade before tariffs kick in. As these one-off drivers fade, we expect growth to moderate but only to post credit-crises levels,” Deshpande wrote.
While macroeconomic indicators are not predicting a recession in 2019, “the selloff in cyclical equities reflects growth concerns,” Deshpande said. “Margin compression driven by tariffs and wage inflation is a key concern. We estimate the direct impact on interest expense even if Fed hikes by 100bp is only 0.5%. Capex spending has not accelerated and companies are using repatriated cash to pay down debt and return cash to shareholders via buybacks.”
Price-to-earnings multiples have fallen to levels last seen in 2012 in the wake of the recent selloff, Deshpande said. This has flattened S&P 500 price returns as valuations have declined, even given relatively strong earnings growth this year. Sectors including Energy, Materials, Communication Services and Financials saw significant valuation contraction due to slower growth expectations in 2019, he added.
“With the selloff earlier this year, the P/E ratio re-rated down and has remained largely range-bound and thus the increase in prices was more driven by earnings. The selloff during October led to a second leg down in valuations,” Deshpande wrote. “The convergence to fair value has happened much faster than the historical speed and so there is no reason to expect that it would rebound. Indeed, since the current P/E ratio is still higher than the fair value it will continue to decline over time.”
(*Note: Harvey reduced his price target for 2019 to 2,665 and expected EPS to $166 as of December 21)
Chris Harvey, head of equity strategy at Wells Fargo Securities, said in a note in early November that investors are in for a rally following October’s sell-off. The S&P 500 fell about 7% in October in the first of several crushing months for stocks.
His forecast called for a price target of 3,079 by the year-end of 2019 for the S&P 500, representing about 14% upside from the close on October 31. The “sell-off creates double-digit opportunity,” he said in the note.
Harvey also maintained target of 2,950 for 2018.
Citi (Target: 3,100; EPS: $172.50) – Bearish sentiment makes for bullish outcomes.
Citigroup analysts carry an upbeat forecast for U.S. equities despite the recent steep selloff. The firm’s sentiment metric suggest a “near 90% probability that the S&P 500 is higher in a year’s time.”
“The 7% rout last month in the S&P 500 with continued pressure in IT and Communication Services names, not to mention Consumer Discretionary stocks, has left clients uncomfortable, though not yet panicked,” Citigroup Chief Investment Strategist Tobias Levkovich wrote in a note. “The good news is that 2019 estimated consensus EPS growth has slipped from a very unlikely 12% back in September to 9% currently, probably on its way to 6%, at which point a ‘meet or beat’ environment can reemerge.”
Value stocks will begin to overtake growth stocks, Levkovich added, especially in the wake of tech stocks’ steep declines in the fourth quarter. “It is plausible that fund managers may need to take down their tech exposure on every rally given overweight positioning when the stocks were on a tear to the upside,” Levkovich said.
“We were far more worried in September about the S&P 500 than we are now given sentiment and our year-end 2018 target of 2,800,” he added. “Equities are resetting to the new lower 2019 earnings expectations and there is some normalization in the value/growth issue.”
JP Morgan (Target 3,100; EPS $178) – A pain trade to the upside.
(Price target as of December 7)
“We expect the equity pain trade to be on the upside, given diminishing tariff and Fed related risks, positive earnings growth, attractive valuations, continued shrinkage of equity supply via buybacks, and given very low investor positioning,” JP Morgan’s Dubravko Lakos-Bujas said.
“Based on our probability-weighted analysis of US-China trade outcomes (55% trade deal, 35% cease-fire, 10% tariff escalation), we set our 2019 S&P 500 price target to 3,100 and EPS estimate at $178. Over the next 12-months we could see more than $1.5 trillion worth of demand for US equities through buybacks (~$800b), partial reinvestment of dividend income (~$250b), as well as discretionary hedge fund and systematic flows (~$500b would take equity positioning to ~50%-tile) as volatility normalizes.”
BMO (Target 3,150; EPS $174) – Take a longer-term perspective.
(Price target as of November 16)
Stocks will grind higher in 2019, buoyed by still-strong economic growth and corporate balance sheets, as well as gradually compressed risk premiums, according to Brian Belski, BMO Capital Markets chief investment strategist.
The firm’s base case is for the S&P 500 to climb to 3,150 in 2019 from 2,950 in 2018. Such an outlook depends on margins remaining sustainable even in the face of interest rate and tariff challenges, and economic momentum continuing to charge forward with inflation still in check.
BMO’s bull case is for the S&P 500 to jump to 3,400, which would manifest if corporate reinvestments were to surprise to the upside and economic growth accelerated at a faster-than-expected clip, Belski wrote. However, BMO’s bear forecast sees the S&P 500 slipping to 2,500, which would come about if tariffs leave a major dent on corporate margins and price multiples contract on concern of a looming recession.
“There are storms brewing. Volatility has clearly returned and the real rate of return for bonds has been negative for several years. Furthermore, corporate earnings will have a hard time keeping up with the momentum displayed in 2018, while the Fed has many investors envisioning a misstep in 2019,” Belski said. “However, we believe the forecasts are too focused on the absolute numbers and lack longer-term perspective. Remember, the environment remains a very good recipe for stocks – high-single-digit earnings growth, STILL low interest rates, 2.5-3% GDP and increased dividend growth.”
UBS (Target: 3,200; EPS $175) – A rough 2018 should make for a better 2019.
(Price target as of November 13)
Although the S&P 500 has declined amid risks of higher rates, tariffs and slowing growth, stocks’ weak performance this year could pave the way for better returns in 2019, according to UBS chief strategist Keith Parker.
The S&P 500 has declined by more than 2x in 2018, and in the years following a decline of more than 1x, S&P 500 have averaged about 16%, Parker wrote in a note. Moreover, sector and industry group returns tend to also reverse in the years following a large de-rating of the S&P 500 price to earnings ratio, suggesting “that investors should be looking to add some laggards as we head into 2019,” Parker said. Headwinds to earnings include higher labor costs, previous US dollar strength and slowing growth. On the other hand, stock buybacks will pose a tailwind, Parker added.
UBS’s base case for 2019 is for the S&P 500 to reach 3,200, from 2,875 in 2018.
Deutsche Bank (Target: 3,250; EPS: $175) – A while to “regain its prior peak.”
(Price target as of November 19)
U.S. companies will head into 2019 following a “great de-rating” this year, according to Deutsche Bank analyst Binky Chadha.
This year’s earnings growth of 25% – the strongest of this cycle – saw equity multiples “severely” de-rate by 17%, Chadha noted.
“The market multiple is near 5-year lows seen at the time of the last two major growth scares, with broad-based multiple compression across sectors that was concentrated in the cyclical sectors” Chadha said. “After the great de-rating of 2018 … a sharp slowing in growth and a high probability of recession is priced in.”
Chadha predicts that headline growth will slow to 7% in 2019, with S&P 500 EPS of $175 from a revised $163.5 in 2018.
A host of factors will contribute to the deceleration, Chadha said. The end of 2018, for instance, will mark the anniversary of the cut to the corporate tax rate, which provided a boost to earnings in the first part of the year. Additionally, tumbling oil prices will affect energy sector earnings, “which will turn from having been a strong tailwind for headline S&P 500 EPS in 2018 to becoming a notable headwind in 2019,” Chadha added. The strength of the trade-weighted dollar and a slowing of global growth will also put pressure on earnings, he said.
“It will take a while for the market to regain its prior peak” after rollercoaster equity trading in 2018, Chadha said. Volatility shocks take a while for equities to recover from, and buybacks “which have been the only consistent source of demand for equities in the cycle will once again become the primary driver. But they argue for only a gradual trend higher,” he added.
“The list of worries for the market is long and concerns about peak earnings are unlikely to dissipate until there are clear signs growth is steadying,” Chadha wrote.
Credit Suisse (Target: 3,350*; EPS $174) – Bet on multiples expanding.
Credit Suisse’s Jonathan Golub carries a bullish outlook for 2019. His price target of 3,350 implied an about 11.4% annualized advance following the 16 months after his forecast was first published in September.
Multiple expansion, rather than corporate earnings growth, will be the main driver of the gains, Golub said. He foresees EPS growth decelerating to 7.7% in 2019 from about 23% in 2018, “largely the result of fading tax impacts.” Other risks include the threat of a yield curve inversion given the narrowing gap between government bond yields, as well as continued tightening from the Federal Reserve.
“Despite these headline risks, we believe that solid economic/EPS growth and benign recessionary risks will be sufficient to propel the market higher,” Golub said.
NOTE: A version of this story was initially published on November 27, 2018.
