Bulls Trample Bears as 20% Stock Gains Seen Within Reach For 2019

Despite growing concerns that an economic slowdown is triggering an earnings recession, bullish sentiment still reigns in the U.S. stock market. The S&P 500 Index (SPX) was up by 17.3% from its low in December and by nearly 10% year-to-date as of yesterday's close. After December's market plunge, forecasts of 20% gains seemed unrealistic. Now a 20% advance in 2019 alone appears to be within reach, and that also would represent a 29% rebound from the 2018 bottom.

Among the prominent investment professionals who believe such gains are realistic include John Lynch, chief investment strategist at LPL Financial, a wealth management firm with client accounts worth $628 billion, Julian Emanuel, chief equity and derivatives strategist at investment banking firm BTIG, and Paul Meeks, a veteran technology analyst and fund manager. The table below presents Lynch's and Emanuel's S&P 500 targets.

2 Strategists' Forecasts For S&P 500

• LPL Financial: S&P 500 reaches 2,975, up 18.7% in 2019
• BTIG: S&P 500 reaches 3,000, up 19.7% in 2019

Sources: Business Insider, CNBC

Significance For Investors

Paul Meeks did not offer a specific projection for the S&P 500 in 2019. However, he did tell CNBC, "I would say that when you get to December 31 of this year, the Nasdaq [Composite Index (IXIC)] will be up double digit in calendar 2019. And, it will outperform both the Dow and the S&P [500 Index]." He is encouraged by the fact that tech stock valuations have fallen enough to make some of them attractive investments once again.

While some observers, most notably Morgan Stanley, see corporate profits sliding precipitously in 2019, John Lynch of LPL Financial thinks that these concerns are exaggerated. His optimistic outlook rests to a large extent on an expectation that the U.S.-China trade war will be resolved in a fashion that boosts corporate and investor confidence.

"Once we get signs of trade progress, companies can start investing in property, plants, and equipment, which keeps productivity up. That can extend the profit cycle, even if we're challenged for a couple of quarters," Lynch told BI. Meanwhile, Citigroup recently released its own assessment of the U.S.-China trade negotiations, assigning a small probability of 5% to a bullish resolution, but giving 40% odds for a bearish outcome that will send stocks tumbling.

Lynch also says that consensus earnings estimates are wrong by 300 basis points on average, meaning that a forecast of no growth has a reasonable probability of being followed by an actual increase of up to 3%. He expects profit growth to be 6% in 2019, in line with historical averages. "We have a good economy and good profits. We've never had a recession this close to record profits, and we've never had a global recession without the U.S. starting it," he said.

Julian Emanuel of BTIG agrees. "The economy is not slowing the way people fear. That's where the upside comes in. We do think any weakness is a buying opportunity," he told CNBC. On the other hand, Paris-based Societe Generale finds that two indicators with strong predictive track records are pointing toward an economic slowdown, and possibly a recession.

Looking Ahead

As is usual, expert opinion is sharply divided on the course of the economy and the market and many market watchers warn that the current bull rally could unexpectedly turn bearish. That means investors might be prudent to develop both defensive - and offensive - investment positions during the rebound.