2019 is a crucial year because it markets the 10 year anniversary of the bottom of the most recent financial crisis. 2009 was full of despair, as the S&P 500 touched an ominous intraday low of 666. But inexplicably on Feb 27, 2009, the carnage stopped, and we’ve had a nice run up ever since.
The question is, what’s next after a rocky 2018. We’ve got interest rates rising, housing markets slowing down, valuations near all-time highs, and geopolitical uncertainty, which never seems to go away.
Here are the S&P 500 forecasts from some of Wall Street’s top strategists.
2019 S&P 500 Price Targets From Top Wall Street Strategists
Most Bearish Target: Morgan Stanley, Michael Wilson
S&P 500 Price Target: 2,750; EPS: $176 = 15.62X P/E
“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.”
Wilson believes earnings will decelerate, and given higher interest rates, he doesn’t believe the S&P 500 will go anywhere. He is on record as saying that “we are in a rolling bear market.”
Despite having a 2,750 S&P 500 price target for 2019, he does have a bull and bear case of 3,000 and 2,400, respectively. In other words, he’s hedging himself, as all Wall Street strategist do who want to remain employed.
Most Volatile Target: Bank of America, Savita Subramanian
S&P 500 Target: 2,900; EPS $170 = 17X P/E
Bank of America Merrill Lynch chief U.S. equity strategist Savita Subramanian believes the S&P 500 will climb to 3,000 in 2018 and then drop by 2,900. That’s some crazy volatility given the S&P 500 is only at 2,673 as of November 27, 2019. There is little chance the S& 500 rallies by a whopping 12.2% in the month of December.
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 in 4Q2017 – which tends to lead equities by about two years. Bank of America also projects 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.”
Moderate Target: Goldman Sachs, David Kostin
S&P 500 Target: 3,000; EPS: $173 = 17.34X P/E
“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.
In other words, large cap dividend aristocrat stocks are at the top of his list.
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.
Here is how David Kostin hedges to save his job for one more year. After all, Goldman MDs have a base salary of over $400,000 and bonuses in the millions.
Base case: predicts with a 50% probability the S&P 500 rises 5% to 3,000 from 2,850 at the end of 2018.
Bear case: predicts with a 30% probability the S&P 500 falling to 2,500 at the end of 2019 on fears of a likely recession in 2020.
Bear case: predicts with a 20% probability the S&P 500 closes 2019 at 3,400.
Moderate Target: Barclays, Maneesh Deshpande
S&P 500 Target 3,000; EPS $176 = 17X
“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 2018 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.”
Bullish Target: Citigroup, Tobias Levkovich
S&P 500 Target: 3,100; EPS: $172.50 = 18X
Tobias’ model is telling him there is a “near 90% probability that the S&P 500 is higher in a year’s time.”
“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.”
“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.”
Bullish Target: BMO Capital Markets, Brian Belski
Target 3,150; EPS $174 = 18.1X
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.
Bullish: UBS, Keith Parker
S&P 500 Target: 3,200; EPS $175 = 18.3X P/E
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 his strategy note. Declining by 2X makes no sense. 2X of what?
He says, “that investors should be looking to add some laggards as we head into 2019. 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.
Super Bullish: Credit Suisse, Jonathan Golub
S&P 500 Target: 3,350; EPS $174 = 19.25X P/E
Jonathan Golub is looking for P/E multiple expansion, which is extremely bullish and unlikely given 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.
Honestly, Jonathan is out to lunch. There is no way we will get a P/E expansion with such headwinds. But at least he ain’t in outer space like Thomas Lee from Fundstrat who believes Bitcoin will finish at $25,000 by year-end 2018 while the price is currently under $4,000.
Historical S&P 500 P/E Average
A good equity investor is able to properly forecast earnings and then predict what the right valuation multiple is other investors will agree on. To project earnings, we should first understand the past.
Let’s look at historical P/E valuations based on current year multiples. As you can see from the chart, valuations have been creeping higher since 2011 (multiple expansion), but they are nowhere near as egregious as the P/E multiples achieved in 2001 (48X) and 2007 (120X).
Given the S&P 500 corrected about 10% in 4Q2018, the market is currently at about 20X P/E, which is slightly below the 20-year historical mean.
Now let’s look at the historical forward P/E multiple chart. We’ve seen a great compression in forward P/E multiples – down from 22.5X at the beginning of 1Q2018 to now only 17.05X at the end of 2018 for 2019.
Based on historical current and forward P/E multiples, it doesn’t seem like a price target of 3,000 – 3,100 for the S&P 500 in 2019 is unreasonable. And now we can get a better understanding of why Jonathan Golub’s S&P 500 price target of 3,350 could actually come to fruition because 19.25X forward P/E is still below average for the past several years.
I’m hopeful the market sees rising interest rates in 2019 as a bullish sign that the economy is growing. Yes, rising interest rates hurts affordable and slows down investment growth as investors decide to park their assets in cash. But a 2.5% – 3% Fed Funds target is low based on historical rates.
Everybody needs to do a proper asset allocation assessment to make sure what you’re investing in is congruent with your risk tolerance. The best free tool I’ve found that can analyze your investments is by Personal Capital. They’ve got this Investment Checkup tool that runs all your portfolios through an analyzer to assess your exposure, weighting versus recommended, and so forth. Below is a snapshot.
About The Author
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college working at leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
FinancialSamurai.com was started in 2009. It is one of the most trusted personal finance sites today and has been featured in top publications such as the The Wall Street Journal, the LA Times and The Chicago Tribune.