There's a lot of uncertainty as we head into 2019. The Fed is expected to raise rates another two to four times. We've got a slowing housing market thanks to rising rates, rising inventory, and lower overall affordability. We also have constant geopolitical risk that never seems to go away.
As investors, we must properly forecast the future AND put our money where our forecasts are. To just forecast while taking no risk is like wanting to go straight to the corner office without putting in any work – it makes no sense!
I'm guessing one of the reasons why you enjoy reading Financial Samurai is that I'm not just pontificating about investing. I'm actively trying to build my net worth to live a middle class lifestyle in an expensive city. Sometimes I strike out. Sometimes I hit a home run. Hopefully, through self-reflection and through community feedback, we can make better investment decisions.
To get savvier, let's look at what some of the top Wall Street strategists are forecasting for the S&P 500 in 2019. These folks spend 50 – 70 hours a week thinking about the stock market, writing research, and speaking to the largest money managers in the world. Surely, they know more than the average retail investors.
There are just a couple caveats. One, they aren't putting their own money at risk or managing money for others. Two, they love to hedge their forecasts because that's how they earn Managing Director-level compensation which starts at $400,000 a year in base salary and they regularly receive $500,000 – $3,000,000 year-end bonuses, especially if they can get their forecasts right.
Wall Street S&P 500 Forecasts For 2018
Before we look at Wall Street's 2019 forecasts, let's first look at their 2018 S&P 500 price target forecasts. As of Dec 2, 2019, we're at 2,760 on the S&P 500 after Fed Chair Powell gave a more measured speech about his interest rate hike plans.
Therefore, we know that unless we have a miracle rally towards year-end, the folks at UBS (3,150 target) and Canaccord (3,200 and never heard of them) are not getting paid. Conversely, the folks at Morgan Stanley, Goldman Sachs, Citigroup, Wells Fargo, BNY Mellon, and RBC Capital look pretty spot on. These forecasts are updated as of this post as well.
Wall Street S&P 500 Forecasts For 2019
Let's now look at 2019 forecasts and see what some of the bigger hitters have to say.
Most Bearish Target: Morgan Stanley, Michael Wilson
S&P 500 Price Target: 2,750; EPS: $176 = 15.62X P/E
Michael has gotten 2018 right so far with a 2018 S&P 500 target of 2,750 – or no change versus 2017. Given Michael has the closest forecast amongst his peers, he deserves the most amount of attention.
Wilson is on record as saying that “we are in a rolling bear market.” As a result, he forecasts no change again in the S&P 500 for 2019. Two years of dead money folks! Suddenly, earning 2% – 2.5% on a 12-month CD or 12-month Treasury sounds quite appealing. Besides my public REITs and private real estate crowdfunding investments, my next best performing asset in 4Q2018 is my money market account.
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.
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 to 2,900.
I'm sure most of us would love for the S&P 500 to rally to 3,000 in such a short time period. However, if we were Las Vegas oddsmakers, we'd probably have to give 2:1 odds for anybody to take that type of bet. That's almost a 10% rally required by year-end.
If Savita's 2019 forecasts come true, then despite a drop, 2,900 is still 2019 a 5.5% return from current levels. Her 2019 concerns include trade, geopolitics, a widening federal deficit, increased Federal Reserve tightening, increased volatility, and a peak in homebuilders in late 2017, which tends to lead equities by about two years. This two year lag is the most interesting datapoint from her research note.
I commend Savita's steadfast bullishness for 2018, followed by a let down in 2019. Unfortunately, it seems like Savita won't be getting a nice year-end bonus because 3,000 by year-end is unlikely to happen.
Moderate Target: Goldman Sachs, David Kostin
S&P 500 Target: 3,000; EPS: $173 = 17.34X P/E
David has what I think is the most realistic target for 2018 (2,850), followed by a reasonable 5.3% return in 2019 based on a 3,000 target.
“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.
David won't get as much TV time as Savita from BoA due to her bullishness or Michael, his arch nemesis from Morgan Stanley due to his bearishness. However, by not sticking his neck out there, David will likely get paid handsomely once again this year and next year. David realizes that the key to great personal wealth is surviving as long as possible on Wall Street.
Here is how David Kostin hedges his forecast for 2019 and keeps himself paid.
Base case: predicts with a 50% probability the S&P 500 rises 5% to 3,000 from 2,850 at the end of 2018. A 50% probability is like rating a stock a market perform or neutral. So weak!
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.
Bull case: predicts with a 20% probability the S&P 500 closes 2019 at 3,400.
Bullish Target: Citigroup, Tobias Levkovich
S&P 500 Target: 3,100; EPS: $172.50 = 18X
I like Citigroup because they're been my main bank for 20 years. Tobias' model is saying that there is a “near 90% probability that the S&P 500 is higher in a year’s time.” Those odds make me want to go all-in, but I won't.
Tobias believes companies have sufficiently guided 2019 earnings low enough that they can be more easily met or beaten. He also believes investor expectations have been reset low enough as well for there to be positive surprises on the upside.
With a 2018 S&P 500 price target of 2,800, Tobias has been on target so far. But going from 2,800 to 3,100 in 2019 requires a 10.7% return, which doesn't seem likely. But at least his forecast gives us hope, and for that, Tobias will get a nice year-end bonus. All Tobias has to do is downgrade his S&P 500 price target for 2019 after he gets paid his 2018 bonus in spring.
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 in 2019, despite EPS growth decelerating to 7.7% in 2019. I truly wonder whether legalizing marijuana in so many states is a good thing. We should make a law that financial strategists must take a sobriety test before writing any research forecasts.
First, it's unlikely the S&P 500 will hit Jonathan's 2018 target of 3,000. Meanwhile, he highlights that the fading tax impacts and the threat of a yield curve inversion pose risk to earnings growth in 2019. Therefore, with so many headwinds, I don't understand how Jonathan can assume a forward P/E multiple expansion.
Despite the aggressiveness of his S&P 500 price target for 2019, I commend Jonathan for sticking his neck out. He'll get a lot more attention from the press and from clients. Further, if the S&P 500 does come close to 3,350, he's going to look like a hero and get paid a fat bonus that will more than makes up for a bad 2018 bonus.
Here is a handy dandy chart I compiled of the major Wall Street analyst forecasts for your review. Now let's look at historical valuations.
Historical S&P 500 P/E Valuations
Now that we know what some of the best strategist's S&P 500 price targets for 2019 are, let's get a little educated about how based on historical P/E valuations for the S&P 500, they determine such targets.
We must look at historical current (this year) and forward (next year) P/E valuation multiples. Remember, the value of a stock depends on its earnings, its projections, and valuations at the end of the day.
Current P/E Valuations
As you can see from the chart below, current P/E multiples have been creeping higher since 2011, but they are nowhere near as egregious as the P/E multiples achieved in 2001 (48X) and 2007 (120X). At somewhere around 20-21X current P/E, current valuations are somewhere in the middle of the past 20 years.
Forward P/E Valuations For The S&P 500
We've thus seen a great compression in forward P/E multiples – down from ~22X at the beginning of 1Q2018 to now ~17X at the end of 2018. A 23% decline in valuations is quite significant.
Meanwhile, FactSet puts current forward 12-month P/E ratio for the S&P 500 at closer to 16X after the big rally on Nov 28, below the 5-year average of 16.4X, but above the 10-year average of 14.5X.
As you can see, consensus forecasts are somewhat all over the place. The point is that the current and forward P/E multiples have come way down.
This large decline in earnings expectations goes back to what Tobias from Citigroup says about 2019 being the year of “meet or beat.” The more companies can beat earnings expectations, the higher their stock prices will go.
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. Consensus forward earnings for the S&P 500 is ~$173, which means a 17.34X – 17.9X multiple. However, if earnings are only growing by ~8% in 2019 as strategists are forecasting, the multiples seem elevated.
Jonathan Golub's S&P 500 price target of 3,350 based on 19.25X forward earnings could come true since we were just at 21X-22X forward earnings. But I don't think any reasonable investor would pay 19.25X forward earnings when earnings are expected to decelerate and only grow by half the multiple rate. Besides, by the middle of 2019 investors will start looking at 2020 earnings to make their investment decisions.
I'm hopeful the market sees rising interest rates in 2019 as a bullish sign the economy is still growing strong. Yes, rising interest rates negatively hurt affordability and slow down investment growth as investors decide whether or not to park their assets in cash. But based on historical rates, a 2.5% – 3% Fed Funds target is still low.
It's interesting to note that none of the major firms forecast a decline in the S&P 500 in 2019. I guess the good times will continue to roll! But I'm not holding my breath and would rather be working on building my net worth primarily through my business and partially through various private real estate investments than through equities.
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Does anyone here listen to Warren Buffet? Put it all in a large cap index fund and hold forever. I am up 19 percent in 2019 and I’d be up 23 percent this year if I had taken my own FL advice. I sidelined it in early October thinking this was the big one (drop). Wrong! Never try to time the market. Even u guys that do this stuff for a living can’t time it. It’s almost impossible.
The strategists are forecasting 20% to 25% gains in 2019? Even the most bearish forecast is a 15% gain from current levels… It must be a great time to buy!
For good measure, my “bearish” forecast for the S&P 500 is 2,160 by December 2020, a loss of 10% from current levels. Let’s see who’s right!
I am a private equity professional that read quite extensively on the markets. Most of the professional news sources (not WSJ, more like Bridgewater Daily) are suggesting that the next 2-3 years will be turbulent in the stock market. I would urge people to do their own due diligence and not listen to these sell-side analysts – most of them are extrapolating recent out-performance of companies (which has been boosted by trump’s tax reforms) into the next decade.
Agreed. It was amazing how many of those sell-side analysts are grossly wrong. Anybody else in other industries with such demonstrated gross incompetence would have been fired long ago.
Want to participate in the market, but without the downside?
SPY Dec 2020 280 calls can be purchased for $25. You can get a 3% CD now days. So you have 6% (2years at 3%) to put toward these calls. At 275, 6% is $16.50 putting you at a $8.50 (3%) max loss. If ya want (almost) no loss, sell the 325’s for $8. You’ll get most of the upside upto 325 (18-ish%) at the end of two years and it will cost ya .2% or so.
There are some minor mis-calculations up there that I realize, intent is to show the way to participate if you are fearful.
It can be a long discussion but you can sell a 30- to 45 day expiration, say 16 delta OTM call to reduce the cost base of you 2020 long call, and you don’t need any extra capital to do that. It may cap your upside move but the probability of your OTM short call gets touched is only 16%. You can keep doing that until you decide to take the entire position off.
If it were my trade, I would buy a long ITM 2020 call and sell near month OTM call, as I don’t like buying long calls with only extrinsic values that decay away over time if my direction assumption is wrong.
How does this work?. Post is old – may not get response.
Would like to understand so I can use now.
It is amazing these sell side analysts can be drastically wrong in their predictions and still can keep their jobs.
With your movements in/out of equities during these periods, I’m sure you have factored in the impact of taxes (short/long term gains) on your performance? Just curious how you manage that? While I try to do some of this in my non-taxable (401k/IRA) accounts, I’ve always tried to minimize my taxes and take a much longer term focus on the taxable accounts.
I also keep a ‘phantom’ account (not real) that I use to test what would happen if I did this across the board with no regard to taxes. I’ve had good and bad years, but overall it has not done as well as a more conservative buy/hold, selling only for tax loss harvesting. I also believe that if I was doing this for real, performance would be less as I wouldn’t be as willing to take as much ‘real risk’.
Mos def. Rollover IRAs don’t have tax consequences when trading until withdrawal.
Generally best to hold for 12-month + to pay long-term capital gains tax rate.
Really, the most bearish forecast that analysts come up with is slightly up from where the S&P is now? No surprise. Human beings suffer from the delusion of recency bias. You’d think “professionals” would take that bias into consideration. I remember in 2007 analysts predictions had similar upward trajectories. Folks as Buffet says, be fearful when everyone is optimistic.
I chose to keep my cash in P2P and interest income fund. I’ll end the year up by just under 7% from those returns. Given the S&P turned negative and is sitting at only 3.2% gain going into year end, happy that I made this decision. I’m estimating 2019 to be a similar year with lots of up and down but ending up close to where it started. Therefore, I’m staying with my 2018 strategy. I will leave a fair amount of cash available to purchase stock if the market drops significantly during 2019.
Sound strategy Brian
Really makes a lot of sense…and I do think 2019 will be very similar to 2018 unless there will be a major crash and recession starts…
Don’t be scared, embrace the bear, that’s how you make money by buying low remember? And watch copper prices after the summit this weekend! Happy holidays to all you smart investors out there.
-DDave
We are probably looking at the greatest financial collapse in history. It’s all going to burn.
Do not use David Lynch as primary your source for financial information.
Good stuff. Feel free to elaborate and share how you plan to profit from the great collapse. thx
Loved the not so subtle weed joke.
Don’t forget most of these guys predictions last year. Remember when they all were talking about a synchronized global recovery? Put your money in emerging markets they said. If they wrote these predictions on toilet paper at least they would be good for something.
I don’t have anything against predictions. There fun to make, especially when your right, but it has been shown that throwing darts is as accurate as your average professional money manager for any time period under 4 years.
With all that being said, my prediction is that the stock market will be higher 10 years from now
Here it is.
What return do you need over the next decade? Invest accordingly.
If you need 4% do t take 10% risk.
Your only advantage over the pro’s is a longer term time frame. Otherwise you’ll be beat every year.
Don’t chase short term returns. People have more time and more money than you to achieve that goal. You’ll lose.
Great – where can I get 4% guaranteed?
Savings bonds held for 20 years regardless of the rate. They are guaranteed to double.
For good measure, here is John Hussman’s forecast:
“By the completion of this cycle, I continue to expect the S&P 500 to lose roughly two-thirds of the market capitalization it reached at its September 20 peak.” – https://www.hussmanfunds.com/comment/mc181128/
That’s right; Hussman’s price target for the S&P 500 is 960. At least he actually has skin in the game, although his funds’ performance doesn’t look too good.
What do you think?
Just wanted to make the point that forecasting without “skin in the game” is nonsensical. But… skin in the game is not a sufficient condition for accurate forecasts.
Very cool. Does this means he’s getting blown out of the water? What are his performance numbers on a 1 year, 3 year, 5 year, 10 year etc basis?
I guess so long as he’s losing his clients money, and not his own, he’ll be fine?
$400k base… Wow! Is that just for the top banks or boutique/regional/middle market ones as well? Thanks for all your posts. Huge fan.
Pretty standard for the larger banks. But probably less than 1% of the workforce get there.
This post is so fascinating! Thanks for putting all those forecasts together. If the markets are flat to slightly up next year I will be happy. I’ve been feeling like we are walking off a cliff for a while and have been fearful next year will be only downwards gloom and doom. I’ve been putting more cash into the markets recently so these forecasts make me feel better about my decision to keep legging in little by little during dips here and there. Here’s hoping we end the year strong and things go well next year!
Keeping this in mind do you think I should pull back on my contributions to my 401k that allocated mostly to equities? Right now I am maxing it out. If I allocated less to my 401k I would probably put that money towards my Fundrise account.
Donno your age, net worth, financial goals, etc. In general, I would always max out your 401k no matter what.
It’s your after-tax investments where you should probably think more thoroughly.
Think the S&P will be at a round 3000 with 50% probability… well, shoot, I think the Saints have a good shot at the Super Bowl.
Take away the jargon and metrics to find these folks are just throwing darts. Can’t believe they get paid for this. (Only jealous, need to figure out how I can get in on this!)
A point well taken — to me, none of the differences among “predictions” appear statistically significant.
Good analysis and a good question — in a parlor game format my best unprofessional and probably unreliable guess is 2870 – 2910 at the end of 2018. My initial, unprofessional and probably unreliable but not definite guess is 3050 give or take 50 points sometime during 2019.
Do not rely on my very subjective and most likely flawed estimates. Only 20% of my assets are in stocks, and I consider a 2019 5% annual yield acceptable.
I think we similarly see mid-2800s with an early retreat in 2019 and a bumpy overall outlook.
I’d say around 2800; the boost contributing to holiday shopping and traveling, then pulling back in January.
I have a target of 400 for the S&P.
You’ll have to let us know what kind of end-of-year bonus you get.
Good luck with your shorts! It’s always great to put your money where your mouth is.
They might revisit those multiple as well if interest rate start being stable in 2019. I am not sure how many rates hikes analysts assumed in your table above to get those 2019 P/E multiple. Maybe with no more hikes in 2019, they will up their P/E ratio multiple target?
Sam, Do you ever consider writing about individual stocks? I would be curious to see your thoughts on individual FANG stocks in this climate?
Thanks,
Nathan
Amazon:
Seriously The Who f*cking knows question on the century. Either going to stay intact with cloud revenue allowing it to dominate everything without gov intervention then it splits making you a fortune as each of the pieces dominate.
Or it gets killed before it takes over the world and crashes.
Worth owning a piece is how I play it out
Not in posts. I don’t want people who aren’t in my financial situation to follow every move I make. It’s dangerous and inappropriate IMO. Further, I’m not writing about every trade I made.
But, I have been writing about how I’ve been accumulating stocks in my private newsletter. I just published one today saying what I plan to do once the S&P 500 hits 2,850, if it gets there this year.
Then there’s the FS Forum, where it’s fun to talk individual stocks.
Example: Friend Just Bought A Tesla, So I Bought A Tesla Model 3 Amount Worth Of Stock
Who Else Is Buying In This Tech Wreck? – I write about everything I bought in November.
“Savita Subramanian believes the S&P 500 will climb to 3,000 in 2018 and then drop by 2,900.”
If it drops by 2,900, I hope we all have our wilderness survival packs handy! ;)
I agree with Tobias’ notion about investor expectations being sufficiently reset lower. This gives more bias to an upside surprise as companies announce earnings results in 2019. Regardless, I’m transitioning out of stocks in the coming quarter or so as the market likely moves higher in response to Jerome Powell’s statements yesterday because we’re trying to have more stability in our funds for a house down payment in the next 2-3 years.
Because investment forecasting should be viewed through the lens of probabilities associated with ranges of outcomes, I think this recent market pullback provides an opportunity to invest in beaten down stocks unfairly thrown out of favor. I think that could mean tech will likely regain some of its momentum seen during this bull market. Time will tell, but I foresee a market rise into year end 2018 and modest growth throughout 2019. Labor market figures and inflation will tell the story in my mind.
The valuation doesn’t look too bad now. We’ll just stick to our asset allocation and add what we can. I’m not hopeful for 2018 and 2019. It’s been so volatile lately. I’ll be happy if our net worth increases 5% next year. Time to hunker down and avoid spending money.
Alloccate at least 10% to physical gold.
Deutche bank don’t look good after today’s police raid regarding money laundering.
Michael.
Interesting summary of some of the major wall Street gurus. Again have to take everything with a grain of salt as no one really knows how the market behaves otherwise they would go all in with their own money and become instant billionaires.
I actually have this question to pose to you Sam and I have been debating it myself. I am looking to come into some substantial money at the end of the year with the sale of one of my most profitable investments to date (about 85k invested 10 yrs ago will look to have a 7 figure return (and pretty much already have all that initial capital returned in the form of distributions).
As such I was thinking about front loading my daughter’s 529 plan with the max 5 year contribution or should I continue what I had been doing and only do the annual contributions (she is in 8th grade, so have essentially 4.5 years left till college starts).
What would you do in this situation?
I am looking to redeploy this money in other investments as well because I know this cash will feel like its burning a hole in my pocket and I want to invest it (my plan is to put majority of it in real estate syndications) with the balance in the market. .
Here’s my unsolicited advice. Front load the 529 ad get that out of the way. Make sure the investment is I something reasonably conservative depending upon what you’re looking to spend. I’ve got my kids college pre-paid and the house is paid and it’s a HUGE peace of mind component. Granted may not be the best mathematical return. But if your kid has to go to university of X instead of Yale they’ll be just fine….the financial “devastation” you think is a big deal at the time will become a “wow, things turned out just fine” situation at the end.
So having it pre-funded is all upside even if mathematically doesn’t work out.
For the remainder….balance it. So you went in to investment (at probably close to a top) for the 529z
Take the rest and go conservative. There are some good CDs right now at 4% and you can make a nice return plus’s your income that can make up any difference you need (plus your job) later when the kid hits college.
I’m currently riding my equity position 90% not growing, building cash 10% and growing and have college paid for the kids (state U guaranteed) and feel pretty good.
I may feel dumb if the market explodes but I’ve felt pretty smart since 2016 and really….you’ve won. Who cares if you kill it? If you face plant on the other hand you will care
Thank you for the great advice.
It is funny. I have preached against market timing because no one knows where the market is headed but I guess in the back of my mind my hesitation to drop 5 years of contribution (which would have to be in 2019 since I already did max this year)probably is influenced by market timing subconsciously (I don’t want to drop 5 yrs of money at the potential top of a market to see it go down when I could do a contribution annually and have it dollar cost average instead).
Your points make sense. Thanks!
Please do tell what this 11X return investment is!
I personally love cash for 2019 and beyond. Money market rates are at 2.5%+ as are 1-year UST bonds. AAA munibonds are higher for longer-term durations.
I would go $15K/year. Since you have $1M+ return from just this one investment alone, whatever you do doesn’t really matter.
Hey Sam,
It was actually an investment in my medical office practice building. Got in on the ground floor when we built and moved to this new location. Cash distributions yearly for over 10 years have already more than paid for my initial investment.
But yeah very lucky because I did not really understand investing or anything to do with finance back then. Just thought it would be smart to put money into a building and pay rent to myself as well as take advantage of the local economy which has been absolutely booming. Good time to sell too as I think continued rising interest rates etc will cause some impact in CAP in future.
I think the fed did its job and took the punch bowl away before things got crazy. China /USA gets figured out, cheap crude oil fuels rapid expansion. S&P 500 triple top folds bull market returns second half 2019,
What’s your prediction for where S&P 500 finishes at in 2019? ;-)
I believe the S&P finishes at 3,515 with earnings at $190.