Over the past decade, US stock markets have been on an incredible run. In that time the S&P 500 is up 275%, Nasdaq 175%, and the Dow Jones Industrial Average 159%.
This bull market is now the longest on record, but there are signs that the pace could be about to slow down. Recession fears and trade wars have both led to market volatility. It was only last December that we saw a sell-off in tech stocks that have powered the current bull market, with the S&P 500 dropping to levels not seen since July 2017.
Where’s the S&P 500 heading in 10 years?
With so much uncertainty in the economy, analysts are asking if the S&P 500’s bull run has the legs to continue in the mid- to long-term.
Bernstein Research thinks so. In their analysis, they argue that the S&P 500 should hit the 4,000 level in the next decade, even if growth does begin to slow.
Driving future gains is investment from baby boomers and companies buying back their own stock. This year alone has seen over $820 billion in buybacks, including a $40 billion buyback scheme from Microsoft [MSFT].
What happens next will depend on the Fed’s long-term interest rate policy. September saw the Fed cut interest rates with the aim of stimulating the economy and getting inflation down to 2%. The hope is to spur growth and offset another scenario like December’s sell-off - triggered by rises in interest rates. Other factors at play include finding a way out of the US-China trade war that has weighed on tech and manufacturing stocks.
Valuation of buybacks in 2019
What could stop the S&P 500’s bull run?
Recession is the big threat to the current bull run. Consumer sentiment has fallen at the same time as fears of an upcoming recession have grown. Over a third of respondents to a Bank of America survey suggested one is likely next year.
Bond rates suggest that this could happen. Rob Isbitts, a portfolio manager and senior contributor on Forbes, points out that the 10-year bond rate is close to the 2-year rate. If this were then to move into negative territory, the phenomenon is often flagged as a recession indicator, which would then curtail the S&P 500’s gains.
But a decade is a long time and the index could weather a recession and rebound. After all, between 2005 and 2015 it climbed 142%, and this period includes the 2008 financial crisis that plunged the world economy into recession.
S&P 500's growth between 2005 and 2015
One problem that the S&P 500 shares with the Dow Jones and Nasdaq is a changing population. The baby boomers who have poured money into buying equities will be replaced by Gen-Xers and millennials, who could have different investment priorities. But for this to pose a significant problem means discounting emerging market and institutional investment.
What’s the short-term outlook for the S&P 500?
Even in the short-term, analysts are finding it tough to predict where the S&P 500 will finish in 2019. In 2018, the standard deviation between the top stock forecasters’ targets tracked by CNBC’s Market Strategist Survey was 4%. This year, the figure is 11%.
Deutsche Bank is the most bullish, and expects a 3,250 finish, a 16% upside year. Morgan Stanley are the most bearish, expecting a 9.6% gain.
Standard deviation for 2019 versus 4% in 2018
Opportunity in small caps
The biggest long-term opportunity might actually lie outside the main US indices. According to Bloomberg's Fred Ingert, small cap stocks look set to outperform large caps over the next decade.
While the S&P 500 is up almost 7% in the past 12 months, the Russell 2000 - which tracks US small caps - has dropped 4%. This makes small caps an attractive buy according to Ingert. He argues that these stocks tend to outperform large caps when the Fed cuts interest rates and are less prone to international trade conditions.
Obviously, traders will need to pick carefully. Small caps don't necessarily offer the same security as an established institution like Bank of America. But for traders willing to look beyond the major US stocks, these could represent a good long-term bet.