Investors can’t seem to catch a break this year amid the S&P 500’s (^GSPC) paltry 2% gain, but some historical market trends are pointing to a strong 2019.
That’s the assessment from fresh UBS analysis, led by chief U.S. equity strategist Keith Parker. UBS said the S&P 500’s price-to-earnings ratio has declined by 2x earnings so far this year.
That’s because stocks rose parabolically throughout the month of January, clocking a 7% gain in that month alone, before plunging into correction territory in the months to follow.
This year’s drop in stock valuations could pave the way for better stock returns in the coming years. “In the years following a P/E decline of >1x, S&P 500 returns have averaged 16%,” the analysts said.
Even with the recent bout of volatility, UBS remains bullish on stocks. While October’s 7% pullback in the S&P 500 trounced the 5% dip UBS was expecting, they still see the S&P 500 rising 17.4% from now until the end of 2019.
“We target 3200 for the S&P for 2019 year end on 7% EPS growth and a rise in the P/E, in line with history after de-ratings,” they said. “No further trade escalation, solid but slowing growth and moderately higher rates underpin our view.”
The S&P 500 currently stands at 2,724.
In terms of sectors, UBS is overweight energy, industrials and communication services, a new S&P 500 sector that includes FANG name Alphabet (GOOGL).
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