As we head into the last few weeks of 2018, it is safe to say that this year was full of surprises for the stock market. The S&P 500 is slated to close somewhere around 2,700. Most economists and analysts thought it would end the year at 3,000. Part of the yield curve inverted. No one saw that coming. Trade disputes turned into a trade war. That was also unexpected. Meanwhile, the all powerful FANG names collapsed, the defensive trade came back into favor, tweets drove a seemingly unprecedented number of huge market swings and the Federal Reserve switched from hawkish to dovish.
All together, it was a wild year for the stock market. This wildness doesn’t seem like it will end anytime soon. As such, it seems like an appropriate time make a list of wild predictions for the stock market in 2019.
With that in mind, let’s take a look at 10 wild predictions for the market next year.
Stock Market Predictions: The S&P 500 Has Its Best Year of the Decade
Why It Could Happen: Everyone in the market is freaked out about a potential yield curve inversion. But, history says that after such inversions, you tend to get a market boom before a market bust. Such booms usually last more than twelve months and spark 20%-plus rallies in the S&P 500, with the three most recent inversions sparking 30% rallies in the S&P 500. If the S&P 500 undergoes a similar 30% boom in 2019, that would mark the market’s best year of the decade.
Why It Might Not Happen: Despite recent choppiness, the S&P 500 is still just 7% off all time highs. Thus, a 30% rally in 2019 from here would push this market to levels no one really thinks is possible at the current moment. Plus, valuations in the market are fairly normal, so you won’t get much multiple expansion over the next twelve months. Thus, the market’s gains from here will be powered by earnings growth, and it is highly unlikely we get anything near 30% earnings growth next year.
Stock Market Predictions: The S&P 500 Plunges More Than 30% In 2019
Why It Could Happen: There are plenty of reasons to be worried about stocks in 2019. The yield curve is flattening and has inverted at some points. Such inversions often happen twelve to eighteen months before a major bear market. The U.S. and China have struck a trade truce, but trade war concerns still linger. Short-term rates are still going up, despite dovish speak from the Fed. Valuations, while normal, aren’t cheap. Growth estimates are coming down. All together, there are plenty of concerns out there, and all those concerns give credence to this fairly convincing analog model, which calls for a 1987-like crash in the stock market in 2019.
Why It Might Not Happen: Analog models shouldn’t be taken very seriously, since you can put any two random squiggly lines together, shift them to your liking, and arbitrarily set beginning and end dates. Eventually, they will line up, but them lining up doesn’t provide any meaningful insight. Moreover, valuations are fairly normal, earnings and sales growth is still good, the consumer remains confident, debt levels are checked, the Fed is clearly backing off its aggressive rate hike agenda, and the U.S. and China will likely strike a trade deal soon. Thus, while markets may not roar higher in 2019, the outlook for markets to crash by 30% is equally unlikely.
Stock Market Predictions: Apple Buys Tesla
Why It Could Happen: Consumer tech giant Apple (NASDAQ:AAPL) has lost its position as the world’s most valuable company because of struggles in its core iPhone business. Because the global smartphone market is largely saturated, the outlook for the iPhone business to turn around is bleak. Meanwhile, Tesla (NASDAQ:TSLA) is gaining ground as its core product, the Model 3, is just starting on its mainstream global adoption growth track. If Apple wants to reinvigorate growth, and put some of its massive cash balance to use beyond buybacks and dividends, then buying Tesla — a company with similar branding — could be a smart move.
Why It Might Not Happen: Tesla CEO Elon Musk doesn’t want to give up control of his company just as its ramping toward global success, nor does Apple CEO Tim Cook want to take the risk of shuffling out nearly $100 billion to buy a company that is still scantily profitable. Rumors of an Apple-Tesla merger have floated around for several years now. Nothing has materialized yet, and it is unlikely that anything will materialize ever, let alone in 2019.
Stock Market Predictions: Chinese Stocks Have A “Rip Your Face Off” Rally
Why It Could Happen: Chinese tech stocks have been among the biggest losers from the U.S.-China trade war. Once loved Chinese tech giants like Alibaba (NYSE:BABA), JD (NASDAQ:JD), Baidu (NASDAQ:BIDU) and Tencent (OTCMKTS:TCEHY) have all dropped into bear market territory. But, the underlying growth fundamentals supporting many of these stocks remain strong, while the valuations are ostensibly quite cheap. Thus, if the U.S. and China strike a trade deal that is favorable for China, these severely beaten-up tech stocks could stage a huge rally.
Why It Might Not Happen: Sentiment in Chinese tech stocks remains dour. Part of that is because of trade war tensions. The other part is the fact that margins across the board are compressing due to bigger domestic competition and more aggressive investments. Thus, if the trade war issue gets fixed, only half the problem is fixed. That will result in a strong rally for Chinese tech stocks. But, a “rip your face off”, 50%-plus rally to fresh all time highs won’t happen for these stocks until margins stop falling, and no one really knows when that will be.
Stock Market Predictions: Amazon Buys Target
Why It Could Happen: E-commerce giant Amazon (NASDAQ:AMZN) is starting to feel the heat from competitors Walmart (NYSE:WMT) and Target (NYSE:TGT) building out formidable e-commerce platforms. Consequently, Amazon’s e-commerce growth rates have slowed dramatically over the past several quarters. Amazon doesn’t like to suffer from slowing growth, so they will likely try to fix this. One way to do this? Buy Target. Much like Whole Foods, Target’s underlying demographic of largely middle-to-upper income shoppers has heavy overlap with the Amazon Prime user base, so this acquisition would be yet another opportunity for Amazon to grow its share of wallet among its core demographic. This would re-charge e-commerce growth (Target is growing its digital business at a near 50% rate) and reduce competition.
Why It Might Not Happen: Amazon buying Target could very well happen, but reasons it might not happen include Amazon’s decision to attack e-commerce alone, and/or Amazon’s decision that offline retail is something they want to try on their own first. Neither of those decisions seem all that likely. Amazon acquired Whole Foods because it wanted to grow share of wallet among its core demographic and increase its offline retail presence. Acquiring Target does the same thing, at a reasonable price. As such, this wild prediction actually seems quite possible.
Stock Market Predictions: Match Becomes The New Facebook
Why It Could Happen: 2018 is a year Facebook (NASDAQ:FB) is going to want to forget. But, while Facebook struggled, another digital social company had a record 2018: Match (NASDAQ:MTCH). Why? Because, arguably, Facebook is too big for its own good, doesn’t have much growth left, and gets all its money from digital advertising, which is being threatened by regulation. Meanwhile, Match, which is powered by dating app Tinder, isn’t all that big yet, still has a lot of potential user growth left, and gets all its money from subscriptions so it doesn’t face the same regulatory threats as Facebook. As such, we could be in the early stages of subscription social digital services becoming the norm. In that world, Match could become the new Facebook, and turn into a $100 billion-plus company.
Why It Might Not Happen: Free social media is for everyone. Paid online dating isn’t. As such, Match won’t ever get to hundreds of millions of users, let alone a billion or the 2 billion Facebook has. Because of this, Match won’t ever become Facebook big. That isn’t to say this company doesn’t have tremendous growth potential. It does. But, not $100 billion-plus future valuation growth potential.
Stock Market Predictions: Tesla Hits A $100 Billion-Plus Valuation
Why It Could Happen: Every big idea trend is moving in favor of Tesla right now, and the convergence of these multiple tailwinds (Model 3 production, profitability and market share gains) has pushed Tesla stock to all-time highs in 2018. If these tailwinds continue, investors could send this stock to the moon in 2019. Consider that that there are roughly 100 million new vehicles sold per year. Assuming Tesla gets 15% market share, sells cars at an average price of $40,000 and runs at 10% operating margins, you are talking about potentially $45 billion in net profits (assuming 20% tax rate and sizable interest expense). A market-average 16 forward multiple on that implies a long-term valuation target of $720 billion, meaning that this stock could easily rally above the $100 billion-plus mark in 2019.
Why It Might Not Happen: In order for Tesla to hit $100 billion or more in 2019, all the current positive tailwinds supporting this stock at all time highs need to persist. If any of them fall out, this stock likely won’t hit $100 billion. The most likely to fall out? Sustained market share gains against the backdrop of rising competition. As such, the biggest thing holding Tesla back from a $100 billion valuation is competitors building out EV fleets.
Stock Market Predictions: STARS Become the New FANG
Why It Could Happen: A few months back, I pointed out that while the hyper-growth FANG group had struggled in 2018, the smaller cap hyper-growth STARS group had excelled. That group included Shopify (NYSE:SHOP), The Trade Desk (NASDAQ:TTD), Adobe (NASDAQ:ADBE), Roku (NASDAQ:ROKU) and Square (NYSE:SQ). Back in early October, every member of STARS was up more than 50% on the year. That has since changed during the stock market rout. But, these five hyper-growth tech stocks, all of which are supported by secular growth tailwinds in e-commerce, decentralization, programmatic advertising, streaming, cloud, AI and digital payments, could bounce back in 2019 if market headwinds ease. Ultimately, they could turn into the new FANG acronym within the next few years, if not next year.
Why It Might Not Happen: Long term, the STARS stocks are big-time winners supported by the most powerful secular growth tailwinds in the market. But, this long-term potential doesn’t guarantee spectacular returns in 2019. The most likely outcome for broader markets in 2019 is mildly up, defined by sluggish growth, looming recession concerns and higher rates. That isn’t the best operating environment for hyper-growth tech stocks. The STARS group should do just fine in 2019. But, it will be a few years before STARS becomes the new FANG.
Stock Market Predictions: Disney Stock Becomes the Dow’s Best Performer
Why It Could Happen: For several years, media giant Disney (NYSE:DIS) has been a drag on the Dow Jones Industrial Average. Since the start of 2016, Disney stock has under-performed the Dow by more than 40 percentage points. But, that could change dramatically and suddenly in 2019. Not only is Disney launching its highly anticipated streaming service in late 2019, which could put an end to the company’s cord-cutting woes, but Disney is also heading into a blockbuster 2019 movie line-up that is headlined by the next Avengers, Captain Marvel, Dumbo, Aladdin, Toy Story 4, The Lion King, Star Wars Episode 9 and Frozen 2. All these tailwinds will converge on a pretty cheap Disney stock in 2019, and that convergence could cause shares to pop in a big way.
Why It Might Not Happen: Disney stock will have a really good 2019. But, how good depends on the reception of the streaming service in late 2019 and economic growth in early 2019. Those are still big question marks. As such, Disney stock might not become a big winner in 2019 because of sluggish U.S. economic growth and/or poor reception to its streaming service.
Stock Market Predictions: Value Stocks Finally Come Back Into Favor
Why It Could Happen: For the past several years, and indeed for most of this decade-long bull market, growth stocks have significantly outperformed value stocks. The likes of Facebook, Amazon, Netflix (NASDAQ:NFLX), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA) have powered this market to new highs. But, this growth trade has fallen apart in late 2018 due to slowing economic expansion concerns, and that has investors betting on a value resurgence. If the global economy continues to slow into 2019, then value stocks could finally make their long overdue comeback.
Why It Might Not Happen: It’s tough to see growth stocks being kept down for long. After all, most of these growth names are technology names, and given global secular trends, there is a strong argument out there that technology’s sphere of influence is only growing at an unprecedented rate. As such, so long as certain trends such as cloud, AI and digital technology adoption remain intact, growth stocks should remain favorable to value stocks.
As of this writing, Luke Lango was long AAPL, TSLA, BABA, BIDU, AMZN, TGT, FB, SHOP, TTD, ADBE, ROKU, SQ, DIS, NFLX and NVDA.