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Gains in the U.S. stock market will be hard to find in 2019 as one-time boosts like tax cuts and government spending will fade and the U.S.-China trade conflict continues, according to Barclays.
Maneesh Deshpande, head of U.S. equity strategy at Barclays, said in a note Monday that he expects the to end next year at 3,000, which is the same as his year-end target for 2018. The S&P 500 closed at 2,690.73 on Monday.
"We expect moderate 2019 EPS growth of 7% after a remarkable 2018 run (~25% y⁄y) as several one-off drivers fade," Deshpande said, referring to lower corporate and personal taxes, as well as a bipartisan bill that increased government spending. He also noted that heightened U.S.-China trade tensions actually boosted trade this year as businesses front-loaded some of their orders before tariffs kick in.
"A common thread which runs through these diverse set of drivers is that their impact on growth rates is likely to be one-off," Deshpande said. "Hence … both earnings and economic growth are likely to normalize during 2019."
S&P 500 earnings have been on fire this year, rising at least 25 percent in the first three quarters of the year. Companies got a big boost after President Donald Trump signed a bill late last year that cut the federal corporate tax rate to 21 percent from 35 percent. Back in February, Trump also signed a bill that extended government spending for two years and increased budget caps by about $300 billion.
But as these one-time catalysts lose steam, Deshpande said the U.S.-China trade skirmish could take "a bigger bite out of earnings growth" next year.
"Our base case is that trade tensions are unlikely to abate," Deshpande said. "The administration is likely to focus even more heavily on trade policy since it falls under the purview of executive action as the legislative channel is now closed after the results of the mid-term elections."
China and the U.S. have exchanged tariffs on billions of dollars worth of each other's goods this year as the Trump administration adopts a more protectionist stance on trade. These levies have raised concern this year that tighter trade conditions could hinder global economic growth as well as corporate profits.
"In our opinion, the impact of these tariffs is not currently factored into the consensus forecasts and will only be reflected once companies give explicit guidance," Deshpande noted.
Investors should buy tech, health care and materials in 2019, Deshpande said.
Deshpande noted the tech sector is benefiting from "continued migration" to cloud and artificial intelligence. He also says tech shares should get a boost through the late stages of the business cycle "as healthy profit levels incentivize pushed-out IT upgrades."
On health care, Deshpande said the sector could get an M&A boost as the recent sell-off in "pro-growth companies may create opportunities for transformational deals."
Deshpande adds that improving fundamentals in the materials sector have been overshadowed by concerns of a global economic slowdown, presenting a buying opportunity for investors.