In this installment of our Monthly Market Compass, we look back on 2019 with 20/20 vision.
Hindsight is 20/20, but finding clarity in future uncertainty can be fuzzy. 2019 has been a very rewarding year for investors. One year ago after publishing Outlook 2019 we were all tested with market volatility, and that’s a reminder that we need to continue to be prepared for uncertainty in the markets.
Key Market Trends and Signals
As we look forward to the year 2020 and a new decade, some key trends and market signals will be important to watch. These include progress on U.S.-China trade discussions, slowing global growth, an encouraging outlook from corporate America, and continued strength in consumer spending. To help keep it all in focus, LPL Research Outlook 2020: Bringing Markets Into Focus offers investment insights and market guidance through the end of 2020.
Gross Domestic Product Growth
As Outlook 2020 explains, progress on trade remains central to growth projections. LPL Research expects 1.75% U.S. gross domestic product (GDP) growth in 2020, which reflects the potential for continued trade and geopolitical uncertainties amid the expected gradual slowing of the economy at this point in the economic cycle.
Bond Market and Interest Rates
The bond market also is expected to show a modest increase in longer-term yields, supported by continued flexibility by the Federal Reserve in setting interest rates. LPL Research’s year-end 2020 forecast for the 10-year U.S. Treasury yield is a range of 2–2.25%.
Corporate Earnings and Economic Growth
Expectations for better corporate earnings growth in 2020, along with continued economic growth in the United States, could support stocks at current valuations. After the strong market gains thus far in 2019, corporate earnings may be the primary driver for stocks next year. The LPL Research team calculates that the S&P 500 could increase by mid-single-digits, consistent with profit gains, by the end of 2020, and they believe mild inflation and still-low interest rates will support these valuations. At the same time, we are mindful of our position in this extended business cycle, and we’ll be on the lookout for signs of moderation.
Monitoring Trade Negotiations
Together we will continue to monitor the impact of trade negotiations, the upcoming elections, and keep an eye on developments around the world. The LPL Research Outlook 2020 is here to help, bringing some clarity to a complex investing environment and providing insightful commentary to support investment decisions during the year ahead.
If you have any questions, please feel free to contact us.
Our 2020 year-end fair value target range for the S&P 500 is 3,250–3,300. We base this year-end target on a trailing price-to-earnings ratio (P/E) of 18.75, which we multiply by our 2020 S&P 500 EPS forecast of $175. We believe mild inflation and still-low interest rates support these valuations. Please see the full Outlook 2020 publication for additional description and disclosure.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted.
The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks. All indexes are unmanaged and cannot be invested into directly.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
This research material has been prepared by LPL Financial LLC.
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