2019 3rd Quarter Equity Market Update
Outlook:
Near term (1-3 months): The wall of worry continued to mount during the quarter with the global manufacturing slowdown getting worse, tariffs increasing between US and China, volatile oil prices following the attack on Saudi Arabia, and threats of impeachment gaining traction. However, the S&P 500 was able to produce a total return of 1.7% during the quarter and through the first 9 months of the year is up 20.55% (total return) as housing data turned more positive and the consumer in the US remains resilient. Overall, we continue to believe the Fed put and Trump put likely provide some downside support for equities.
While we are aware that any tweet or news headline can drastically impact market trading over the short-term, we continue to believe the positives outweigh the negatives and take a optimistically guarded outlook into year end. From a seasonality perspective, returns in October tend to be slightly negative, but November and December get into a more seasonal positive period for equities. Given this backdrop, while short-term trading could be choppy, we believe equities can move to new highs and near our price objective of 3053 by year end. Technically, the S&P 500 is near the 50-DMA around 2945. Further downside below the 50-DMA is possible and may test the 200-DMA and low end of the August sell-off around the 2820-2840 level range. In the event that a pullback does transpire, we would opportunistically add to favored sectors. If trade headlines continue to be positive, the next area of resistance is likely at all-time highs of 3027.98. For now, we continue to favor US large-cap equities in the near-term. Moreover, if the yield curve begins to steepen, thus benefiting Financials, Value, which has a large weighting to the Financial sector, may continue to benefit.
Bigger picture (12 months): While the market may stall in the near-term as it sorts out some of the current issues, we believe the positives outweigh the negatives for U.S. equities longer-term. Despite the yield curve remaining inverted, earnings are expected to reaccelerate and continue to grow nicely looking ahead to 2020. Moreover, the Fed and other central banks around the globe have signaled a willingness to use monetary policy as support if the economic outlook does not improve. US equities continue to remain our favored geography. While upside for the remainder of the year remains limited (3% from here) following the price gains of ~18.7% already, our base case price target of 3201 for 2020 would imply upside.
2019 and 2020 Fair Value: Our base case fair value estimate for 2019 is 3053. Under this assumption, 2019 earnings estimate is $165 and apply a 18.5x P/E. Our 2020 price target of 3201 is based on S&P earnings of $173 and a 18.5x multiple.
