LPL Financial’s research group believes 2019 “may be a good year for stocks, with the potential for 8–10% returns for the S&P 500,” according to its midyear outlook released Tuesday.

As in 2018, though, volatility should continue as the business cycle ages, the research analysts who work for the independent broker-dealer point out: “We recommend investors weather these ups and downs by focusing on the fundamentals and diversifying portfolios where appropriate.” 

The researchers add: “We believe stocks may find support from continued steady growth in the U.S. economy and corporate profits as the impacts of fiscal stimulus continue to flow through.”

According to its midyear outlook, LPL is going to keep its eyes open “for any signs of weaker economic or profit growth that could drag stock prices lower. Potential escalation in U.S.-China trade tensions, including more and higher tariffs, remains a key risk to corporate profits and therefore global stock markets in 2019.” 

Large- vs. Small-Caps

“Small-caps generated outperformance early in 2018, aided by being relatively more insulated from trade tensions than large-caps,” the researchers say. “However, as trade issues mitigate, the business cycle ages, and the dollar’s uptrend potentially hits resistance, market leadership may shift back toward large-caps.”

In addition, the analysts explain, “a rising interest rate environment, potentially with tightening financial conditions, may create a challenge for small-cap companies that have higher costs of capital and a greater reliance on debt. Accordingly, over the next several months, we suggest suitable investors shift toward target allocations across market capitalization with benchmark-like exposures to small-, mid-, and large-cap stocks.” 

Growth vs. Value

The LPL research team maintains “a slight preference for value despite its underperformance relative to growth in 2018. We expect value in 2019 to benefit from the pickup in economic growth that began in mid-2018, relatively attractive valuations after a sustained period of growth outperformance, and our positive view of financials.” 

Sectors

The IBD’s research team favors cyclical sectors over defensive sectors, “specifically cyclical value, as we expect the economic expansion to continue through 2019. Industrials are poised to benefit from resolution of the U.S.-China trade dispute and a potential pickup in capital spending, supported by fiscal stimulus.

“We believe financials are attractively valued and remain well positioned to benefit from steady economic growth and deregulation efforts. Finally, we expect technology to continue to deliver strong earnings growth and enable productivity gains for corporate America,” the report says.

U.S. Dollar

The bulk of the dollar’s advance is behind us, according to LPL. “We are less sanguine on the dollar longer term given structural forces such as federal deficit spending. “

More Asset Class Perspectives  

In the new and noteworthy section of the report, LPL highlighted the following predictions for different asset classes:

U.S. Stocks: Superior economic and profit growth and fiscal stimulus provide an edge over developed international equities.”

Value: “Economic growth tailwind and attractive relative valuations compared with growth may help buoy value stocks.”

Cyclical Stocks: “Solid economic growth may support economically sensitive sectors.”

Emerging Markets: “Strong growth, attractive valuations, and potential U.S.-China trade agreement may help emerging market equities outperform.”

Investment-Grade Corporate Bonds: “Economic growth may help credit-sensitive bonds; added credit risk provides incremental yield.”

Mortgage-Backed Securities: “Yield benefit relative to rate risk remains attractive among high-quality options.”

The midyear report shared these views on “the classics”:

Small-Caps: “Tax reform benefits are starting to fade and the cycle is aging, but a domestic focus may help early in 2019.”

High-Quality Intermediate-Term Bonds: “…. offer some potential diversification while avoiding the rate risk of long-term bonds.”

Bank Loans: “Still potentially attractive for strategic investors, but high issuance and weaker investor protections raise some concerns.”

High-Yield Bonds: “May be supported by further economic growth, but we prefer a combination of equities and high-quality bonds.”

In the third category labeled “out of print,” LPL says readers/investors might need to wait for “the next edition,” as these sectors are not gaining traction at the moment:

U.S. Defensive Stocks: “Less economically sensitive sectors may offer lower return potential amid solid economic and profit growth.”

Growth Stocks: “After a sustained period of strong performance compared with value, the growth stock rally may be due for a pause.”

Developed International Stocks: “Growth in Europe has slowed while political challenges are rising.”

Developed International Bonds: “Valuations remain very rich and declining central bank accommodation may create a challenging environment.”

Long-Term High-Quality Bonds: With rates expected to rise, the diversification benefit does not adequately compensate for added rate sensitivity.”