Economics and Strategy Update
The latest U.S. Equity Strategy from Credit Suisse put the year-end price target of the S&P 500 at approximately 3,022 or roughly 7.2% higher than the current 2,819 price on the SPY (SPDR S&P 500 ETF). The last time I introduced 2019 year-end values for the S&P 500 was October of 2018. At the time Credit Suisse predicted 3,300 on the S&P 500. They have now dropped their price target to 3,022 due to a number of factors, which include (1) lower oil prices, (2) lower inflation, (3) a more passive Fed, (4) declining recession fears, (5) some resolution in the China Trade issues and finally (6) a number of technology companies showing deterioration in projected earnings.
This combination of events has driven volatility lower and stocks higher despite earnings estimates of $174 (2019) and $185 (2020) being lowered by $4 for 2019 and $5 by 2020. Nevertheless, research analysts at Credit Suisse now see indicators that investors have not fully re-risked portfolios following the turbulence witnessed in the fourth quarter. So, despite a sharp decline in volatility and credit spreads since then, valuations have remained tame. To illustrate, the current forward price-to-earnings ratio on the S&P 500 remains just 16.4 times earnings. Credit Suisse expected multiples to reach 16.8 times earnings by year-end.
While volatility has dramatically abated since December, technical signals are now pointing to a buyer slowdown. Of 91 industry groups followed by MarketEdge.com, 83 show strong technical trends, three are improving, four are deteriorating and just one group (Household Products-Non-Durable) is weak. An additional industry sector (Airlines) was downgraded. Such overall bullish sentiment typically leads to a period of underperformance and possibly predicts a correction of some 5% before the end of summer. However, a longer-term mindset is best employed through year-end in order to benefit from the entire upside predicted by Credit Suisse in the event $170 in earnings and price-to-earnings expansion consolidate values moving into 2020.
I trust you enjoy these updates. Do let me know what you find valuable. U.S. earnings growth multiplied by a variable price-to-earnings factor is the key to stock market valuations. These price earnings multiples expand and contract according to inflation fears. So, with inflation fears low, currently multiples can expand without pushback from those who would make the case for earnings being fake news when accounting for inflation.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group
2226 Avenida De la Playa
La Jolla, CA 92037
U.S. Equity Strategy, March 18, 2019 Targets Higher, Estimates Lower – Receding Risks Drive Market Higher. J. Golub, P Palfrey, M Bangard, Z Wang and E Cid.
MarketEdge.com, Industry Group, Market Indicators, March 18th, 2019
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided her is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0233.