Here we are well into the fourth quarter of 2019, one of the strongest years for equities in the past 20 years (2013 better). In other words, this is the best year for stocks in a typical career.
As we head into year end, I’m raising my S&P year-end target to 3,185 (+60 points). This is based on $182 EPS (+$2 above consensus) and 17.5x PE (+0.4x above current). The PE works out to a 5.8 % earnings yield compared to an investment grade bond yield of 3.0%. Thus, one could even view stocks as cheap vs credit (same issuer).
In looking back at how we got to this point, the consensus focus has been on the many “tape bombs” that “threatened the cycle.” This includes Trump “ordering all companies home” to Fed stating rates were a “long way from Neutral” to the hard Brexit and inverted yield curves.
But I would argue these concerns were the wrong way to understand markets this year.
2019 is actually a “catch-up year.” Since 2017, EPS grew at 11% annually on average, but price gains were only 7%. Hence, stocks still have room to rise.