- Stocks have been on a “wild ride” so far in 2020: from showing virtually no volatility at the start of the year, to experiencing the fastest bear market in history and then staging the strongest 100-day rally on record, LPL said in a note on Monday.
- And while the market continues to face risks stemming from the COVID-19 pandemic, election uncertainty, and the potential for heightened trade tensions with China, investors should continue to hold on for the potential of more gains ahead, LPL said.
- LPL raised its year-end S&P 500 fair-value target to a range of 3,450 to 3,500, the note said.
- Here are five bullish reasons the stock market can continue to move higher into year-end, according to LPL.
- Visit Business Insider’s homepage for more stories.
The stock market has been on a “wild ride” so far in 2020, LPL Chief Market Strategist Ryan Detrick observed in a note on Monday.
From exhibiting virtually no volatility at all at the start of the year, to experiencing the fastest bear market in history, to staging the strongest 100-day rally on record, it’s been a rollercoaster for sure.
Despite experiencing a 35% intra-year decline, the S&P 500 is up 5% year-to-date as of Monday’s close, and that’s after the recent two-week decline of 7%.
But the market faces risks that could lead to a bumpy ride for stocks into year-end that investors should consider, including the lingering COVID-19 pandemic, heightened trade tensions with China, and election uncertainty, according to LPL.
JPMorgan seems to agree, having pointed out earlier this week eight risks stocks face heading into year-end.
Still, investors should continue to hold on for the potential of more gains ahead, LPL said, adding that it is raising its year-end S&P 500 fair-value target to a range of 3,450 to 3,500, representing potential upside of 2% to 3% from Monday's close.
Here are five bullish reasons the stock market can continue to move higher into year-end, according to LPL.
1. "We're getting COVID-19 under control."
While COVID-19 hotspots remain and school re-openings are mixed across the country, "the national numbers have improved steadily over the past couple of months," Detrick said, noting that daily cases have fallen by 50% from the July peak of 70,000 cases. Hospitalizations and the daily number of deaths have also been on the steady decline. "We now have a better playbook of how to contain the virus' spread and treat patients than we did in the spring," says Detrick.
2. "Economic reopening continues."
"Economic data has consistently beaten expectations as the economy has reopened," according to LPL. Third quarter gross domestic product could reach a record 30% annualized, based on the Atlanta Federal Reserve's GDPNow forecast tracking to 29.5% and Goldman Sachs recently boosted its GDP estimate to 35%, the note highlighted.
"Retail sales have passes their pre-pandemic peak, and housing is booming," Detrick said, adding that the high stock prices support spending via the wealth effect. And while more stimulus from Congress seems less likely over the past few weeks, it's still possible.
3. "Momentum breeds momentum."
"When the S&P 500 has been up five straight months, as it was in April through August, stocks historically have kept going higher," Detrick noted, adding that the last 26 times the market traded higher for five straight months, it was higher a year later 96% of the time.
"We also know from history that bull markets tend to run for years, and the one that started on March 23 is very young," Detrick said.
4. "Earnings estimates are rising."
Analyst earning estimates rose in the second quarter and continue to move higher, according to LPL.
"We think the odds are good that estimates may continue to rise and third quarter earnings from corporate America may surprise to the upside," Detrick said.
5. "We expect the winners to continue to carry us."
LPL noted that the "work from home" stocks that have been leading the market higher since the pandemic sell-off began in February are benefiting from strong secular tailwinds that continue to strengthen amid the pandemic.
"We estimate more than half of the S&P 500 is either unaffected by the pandemic or benefiting from it, with about 40% of the index in technology, digital media, and e-commerce," Detrick said, adding that despite the pandemic, sectors like healthcare, consumer staples, and technology may all see earnings gains this year, according to data from FactSet.