'It ends next year': What Wall Street's biggest firms are forecasting for the stock market

in 2019, and
where they say you should put your money

Akin Oyedele

Dec. 11, 2018, 8:07 AM

Most equity strategists at major Wall Street firms expect 2019 to be another positive year for the stock
market, but with major setbacks.

The feverish gains previously seen during this bull market run are not expected to last much longer, and
assets that previously underperformed are falling back into favor.

Business Insider rounded up the forecasts and investing tips for navigating 2019 from strategists at Wall
Street's top firms.

"Own stocks, but it ends next year."

That quote, from Savita Subramanian at Bank of America Merrill Lynch, neatly sums up the outlook for
next year from most top equity strategists on Wall Street.

After a year that saw the return of volatility, an ever-escalating trade war between the world's two
largest economies, a massive dose of fiscal stimulus, and an extension of the near-record bull run, the
consensus is gradually turning bearish.

Given these factors, investors are being advised to carve out positions in assets that have not been stars
of the nearly 10-year bull market, such as cash and value stocks. Moreover, these assets will come in
handy if volatility remains high and economic growth slows down next year, as is widely expected.

We've rounded up these recommendations and other investing tips for navigating the stock market in
2019 from the chief equity strategists at top Wall Street firms. We've also included each person's year-
end S&P 500 and earnings-per-share targets.

1/14

Goldman Sachs

David Kostin. Brendan McDermid/Reuters

S&P 500 price target: 3,000

EPS target: $173

Forecast: "A higher US equity market, a lower recommended allocation to stocks, and a shift to higher
quality companies summarizes our forecast for 2019," David Kostin, the firm's chief US equity strategist,
said in a note.

"We forecast S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted
return will be less than half the long-term average. Cash will represent a competitive asset class to
stocks for the first time in many years."
Investing recommendations: "Increase portfolio defensiveness. Overweight Info Tech, Communication
Services, and Utilities. Underweight Cyclicals. Focus on 'high quality' stocks using five metrics: strong
balance sheets, stable sales growth, low EBIT deviation, high ROE, and low drawdown experience."

2/14

Bank of America Merrill Lynch

Savita Subramanian. Bloomberg TV

S&P 500 price target: 2,900

EPS target: $170

Forecast: "Still-supportive fundamentals, still-tepid equity sentiment and more reasonable valuations
keep us positive," Savita Subramanian, the head of US equity and quant strategy, said.

"But in 2019, we see elevated likelihood of a peak in the S&P 500. Our rates team is calling for an
inverted yield curve during the year, homebuilders peaked about one year ago and typically lead
equities by about two years and our credit team is forecasting rising spreads in 2019.

"Assuming the market peaks somewhere at or above 3000, our forecast is for modest downside in
2019."

Investing recommendations: "We are overweight health care, technology, utilities, financials and
industrials. Our underweights are consumer discretionary, communication services, and real estate.

"For most of this cycle, stocks enjoyed a lack of compelling asset class alternatives (bonds had elevated
price risk, cash yields hit rock bottom). But 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."

3/14

Morgan Stanley

Mike Wilson. Bloomberg TV

S&P 500 price target: 2,750

EPS target: $171

Forecast: "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," Mike
Wilson, the chief US equity strategist, said.

"Bottom-up S&P 500 consensus EPS growth for 2019 is likely to come down as economic growth
decelerates sharply and cost pressures rise. We think there is a greater than 50% chance we
experience a modest earnings recession in 2019 defined as two quarters of negative y/y growth for
S&P 500 EPS. This growth disappointment is likely to be offset somewhat by a Fed that pauses its rate
hike campaign by June."
Investing recommendations: "We upgrade consumer staples to overweight and REITs to equal-weight
while downgrading industrials to equal-weight. We also maintain a modest preference for large over
small caps."

4/14

JPMorgan

CNBC

S&P 500 price target: 3,100

EPS target: ~8% growth from 2018

Forecast: "We base our market outlook on the view that the business cycle will not end in 2019," said
Marko Kolanovic, the global head of quantitative and derivives strategy at JPMorgan.

"Historically, equity markets peak several months before a recession, and to assume that market already
reached cycle highs would likely mean that the recession needs to start around now. This is, however,
practically impossible given the strong consumer spending, strong PMIs, and growing corporate profits."

Investing recommendations: "We continue to recommend positioning OW in Emerging Markets given

performance, positioning, and sentiment are still poor (e.g., EEM is down over 20% from its Jan'18 high
and down over 25% from its 2007 high, while the S&P 500 is up 75% over that period—a 100% relative
underperformance).

5/14

RBC Capital Markets

Lori Calvasina. Brendan McDermid/Reuters

S&P 500 price target: 2,900

EPS target: $171

Forecast: "While we have a constructive view on 2019 overall, we do think it's possible that the S&P 500
could trade down another ~7- 8% from the November 28th close," said Lori Calvasina, the head of US
equity strategy.

"First, the S&P 500 fell 14.2% peak to trough in 2015-2016 (we think the current period resembles that
growth scare). A similar move from the Sept 2018 high would take the S&P 500 close to 2500.

"Second, we think a bit more multiple contraction is possible as only 3/4s of the typical contraction
around Fed tightening cycles has occurred so far. If the average contraction occurs, it would take the P/E
to ~14.85x, implying a similar move down on RBC's 2019 $171 EPS estimate.

"If those lows are tested and fail to hold, we'd look to the 2010-2011 declines in the US equity market
for guidance.

"We do not believe a recession is on the horizon, but if we are wrong, downside moves could be much
more meaningful."
Investing recommendations: "On the defensive side, we are upgrading staples to overweight from
market weight (it has the best valuation profile among defensives, is deeply out of favor on the sell-side,
& ETF flows have been improving).

"We remain overweight health care, but are putting it on downgrade watch. Margin expectations are
holding up better than other sectors, ETF flows are positive, and our analysts are slightly constructive.
But the sector looks crowded in hedge funds and growth funds and is consensus among sell-side
strategists.

"Health care valuations are no longer cheap, as was the case when we upgraded in July, but do generally
look better than REITs & utilities (where we are market weight)."

6/14

UBS

Tom Naratil Reuters / Arnd Wiegmann

S&P 500 price target: N/A

EPS target: N/A

Forecast: "With the bull market aging, investors will inevitably start to anticipate an end to the economic
cycle," said Tom Naratil, UBS's president of the Americas and co-president of the firm's global wealth
management division.

"However, we do not expect a recession in 2019 and see some segments of the market as oversold. We
have a moderate bias for cyclicals over defensives and value over growth, and also like the financial and
energy sectors."

Investing recommendations: "Take advantage of volatility. An equity buy-write strategy involves

purchasing a stock or basket of stocks while systematically selling call options. Over an economic cycle,
equity buy-write strategies generate attractive risk-adjusted returns, as they capture both the equity
and volatility risk premiums. They are most appealing in current market conditions, when volatility is
higher and prospective equity returns are moderate."

7/14

Barclays

Maneesh Deshpande. Screenshot/CNBC

S&P 500 price target: 3,000

EPS target: $176

Forecast: "We think returns will be primarily driven by earnings and the P/E multiple is unlikely to
bounce after re-rating down this year as both the 'Fed Put' and the 'Trump Call' are substantially
weaker," said Maneesh Deshpande, the head of US equity strategy.
"We expect moderate 2019 EPS growth of 7% after a remarkable 2018 run (~25% y/y) as several one-off
drivers fade and margin compression is a key concern. A recession during 2019 is not our base case but
we are edging closer to the edge."

Investing recommendations: "We remain overweight tech & healthcare, upgrade materials to
overweight, but reduce financials to market weight and industrials to underweight.

"We initiate communication services at market weight and maintain our underweight for consumer
discretionary and utilities, and market weight for energy and consumer staples."

8/14

UBS

Keith Parker. Screengrab/Bloomberg

S&P 500 price target: 3,200

EPS target: $175

Forecast: "To frame the potential impact on earnings and valuation, we consider upside scenarios in
which 1) trade tensions dissolve and existing tariffs are eliminated, and 2) the US economy has further
room to run, with structural improvements allowing above potential growth to continue," said Keith
Parker, the head of US equity strategy.

"To frame the downside, we consider 1) trade escalation, in which all US-China trade is subject to 25%
tariffs; 2) that we are later in the cycle than thought, and Central Banks accelerate hiking to curb
inflation while growth slows; and 3) there is a US recession in 2020.

"We see the probability of downside increasing; however, the balance of risks is still to the upside as a
recession remains unlikely."

Investing recommendations: "We look for a relative catch-up and value amongst the cyclicals. We
upgrade Energy tactically to o/w and pair with Materials (u/w) for a 100bp higher div yield and oil cycle
upside. We also pair Comm Svcs (o/w) and Industrials (o/w) over Tech (u/w) given similar revisions/
growth but a ~20% relative de-rating.

"For defensives, we stay o/w Healthcare and u/w REITs and Utilities. We prefer quality, large>small and
would buy the dip in momentum/ growth for this stage of the cycle."

9/14

Credit Suisse

Jonathan Golub. Screengrab via Bloomberg

S&P 500 price target: 3,350

EPS target: $174

Forecast: "While investors have celebrated recent US profit and economic strength, above-trend growth
rates are unsustainable," said Jonathan Golub, the chief US equity strategist.
"2018's 23% EPS and 2.9% GDP growth are skewed by tax changes, government stimulus, and other
nonrecurring items. Importantly, a renormalization in growth to 7-8% EPS and 2.6% GDP should be
more than sufficient to fuel a market advance."

Investing recommendations: "The backdrop described above should be sufficient to carry equities
higher. However, not all stocks will benefit equally.

"Specifically, more cyclical groups should lag on moderating growth, with bond proxies challenged given
low recessionary risk. Less economically sensitive names, including TECH+, Health Care and Business
Services (within Industrials), should outperform."

10/14

Deutsche Bank

Binky Chadha Bloomberg

S&P 500 price target: 3,250

EPS target: $175

Forecast: "It will take a while for the market to regain its prior peak: once vol gets elevated market
recovers only slowly (6-7 months); concerns about peak earnings are unlikely to dissipate until there are
clear signs growth is steadying, which we don't expect until Q2 earnings," said Binky Chadha, the chief
US equity and global strategist.

Investing recommendations: "Across sectors the defensive rotation has upended historical relationships
between relative valuations and their drivers. We remain underweight Staples which trade at near the
highest valuations in the S&P 500 despite having near the slowest growth; remain underweight the
defensive bond proxies Utilities and Real Estate which are already pricing in a significant decline in 10y
yields to 2.5%; remain underweight Energy where earnings expectations and valuations are stretched
again; raise Materials from underweight to neutral as valuation is now cheap but sustained
outperformance is likely only with the next dollar down cycle; raise Healthcare from neutral to
overweight as valuation is cheap and earnings growth steady; raise Tech from neutral to overweight as
valuation is now cheap; raise Consumer Discretionary from neutral to overweight on undervaluation;
remain overweight the Financials, the cheapest sector on an absolute basis as well as relative to its
drivers; remain overweight the Industrials which are already pricing in a recession; and neutral
Communication Services as strong growth looks well priced in."

11/14

Wells Fargo

Chris Harvey. Screenshot/CNBC

S&P 500 price target: 3,079

EPS target: $173.37

Forecast: "The keys to our 2019 estimates are EPS deceleration (but positive growth) and multiple
compression," said Chris Harvey, the head of equity and quant strategy.
"Our analysis indicates that Fed tightening, yield curve flattening, multiple compression and a peaking of
EPS growth are all relatively correlated. It's what we've seen and what we would expect during a Fed
tightening cycle."

Investing recommendations: "Overall, our mantra continues to be don't fight the Fed but don't be
fearful either. Looking forward, now that equities have traded down, we see double-digit potential over
the next 14 months."

12/14

BMO Capital Markets

Brian Belski. Screenshot via Bloomberg TV

S&P 500 price target: 3,150

EPS target: $174

Forecast: "If we learned one thing in 2018, it's that change is going to be constant, and volatility is going
to reign supreme for the next couple of years," Brian Belski, the chief investment strategist, said on
CNBC.

"And through that, you really want to default to fundamentals and process, and also … be a little
contrarian."

Investing recommendations: "We believe that most institutions are dramatically underweight financials
and we remain overweight on that sector focusing on companies that have scalable business models,
like Bank of America, like Morgan Stanley, like Goldman Sachs and some of the trust banks as well.

"Speaking of contrarian, we're buying the dip in technology, too."

13/14

CFRA

Screengrab/YouTube

S&P 500 price target: 2,975

EPS target: $169.95

Forecast: "We see few opportunities for economic stimulation as a result of tighter monetary policy
and the new congressional make-up," said Sam Stovall, the chief investment strategist at CFRA.

"Indeed, history reminds us that the S&P 500 posted a below-average 12-month price gain of 6.2% in
the 12 months following the end of rate-tightening cycles in the past 65 years, as compared with the
average 8.7% advance for all years. What's more, the 500 rose in price just 56% of the time in post
rate-tightening years versus the long-term average of 72%."

Investing recommendations: "CFRA's Investment Policy Committee recommends a 55% exposure to

global equities and a 45% weighting to fixed income. We suggest reducing the exposure to US equities
to 40% from 45%, while maintaining a neutral 15% exposure to foreign stocks.
One reason for the reduction in U.S. equities is that as of 12/7/18, the S&P 500 has recorded an 11.6%
CAGR in price over the past 10 years, which is above the average of 5.9% since 1918 and more than
one standard deviation above the mean (+11.2%) during this period. Though not a signal of an
impending top, this rolling 10-year CAGR implies that the bull may be running out of steam."

14/14