We see an S&P 500 Index fair value target range of 3,850–3,900 at year-end 2021 with potential for upside if there’s better-than-expected progress on vaccine distribution. A strong earnings rebound may enable stocks to grow into somewhat elevated valuations. Our S&P 500 target is based on a price-to earnings (PE) multiple of 20 and our preliminary 2022 earnings forecast of $190. We see the 10-year yield finishing 2021 in a range of 1.25–1.75%. Inflation is likely to rise temporarily but then normalize, and the Federal Reserve (Fed) is expected to keep rates low. At the same time, an improving economy and even normalizing inflation could put upward pressure on rates, limiting return potential for high-quality bonds.

KEY CHANGES FROM DECEMBER’S REPORT

• Upgraded financials and crude oil views to neutral
• Downgraded communication services view to neutral

INVESTMENT TAKEAWAYS

• Our equities recommendation remains overweight. We continue to favor stocks over bonds based on our expectation for a strong economic and earnings recovery in 2021, supported by additional fiscal stimulus—with potentially more coming soon based on the outcome of the Georgia Senate races— continued progress in combating COVID-19, and the likely continuation of the low-rate environment.

• Key near-term risks include containing the latest wave of COVID-19 while awaiting vaccines and concerns about potential tax increases and tougher regulations under a Democratic-controlled Congress.

• We maintain a slight preference for growth stocks as 2021 begins, bolstered by strong earnings trends and favorable positioning for the pandemic.

• As the economic recovery progresses in 2021, we would expect cyclical value stocks to get a boost. We have taken one step closer to a balanced growth-value view with this month’s financials upgrade.

• We expect solid economic growth across Asia to support continued outperformance by stocks in emerging markets (EM). EM may garner additional support from potential easing of US-China trade tensions, although ongoing geopolitical and regulatory threats may lead to bouts of volatility.

• Our fixed income view remains underweight. While Fed policy and modest inflationary pressure for now may limit the risk of a large rate move, rising rates may still put some pressure on bond returns going out a full year.

• We favor a blend of high-quality intermediate bonds that is underweight US Treasuries with an emphasis on short-tointermediate maturities with sector weightings tilted toward mortgage-backed securities (MBS).

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IMPORTANT DISCLOSURES

This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.

Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity.

Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

All index data from FactSet.

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

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