The Trail Ahead

By LPL Financial Research

At the midpoint of 2020, we’re mindful that it has been an extremely challenging year in the United States and around the globe. We’re in a pandemic that continues to impact us, our communities, and our economies.

Together, we’re looking ahead for new ways to face these challenges and how we can prepare now for better times. We’ve been impressed by what we’ve seen so far: the resiliency and accelerated innovation among large and small U.S. businesses; efforts by our national, state, and local governments to support our communities; and most of all, the dedication and unprecedented cooperation among our front-line health professionals, medical researchers, and everyday people to guide us through this health crisis.

At LPL, we know the stock market is forward-looking: it focuses on what’s happening today and what it sees on the path ahead. Much of the real-time economic data we follow – such as transportation activity, home sales, and jobless claims – is showing tangible evidence that economic activity – while still depressed – has begun to make a comeback.

Stocks already are pricing in a steady economic recovery beyond 2020 that may be supported if we receive breakthrough treatments to end the COVID-19 pandemic. However, the optimism we see reflected in the S&P 500 Index now may limit the size of the gains for the rest of the year.

It’s going to be a challenging environment with significant uncertainty that may lead to more volatility for the next few months. We continue to encourage investors to focus on the fundamental drivers of investment returns and their longterm financial goals.

LPL Research’s Midyear Outlook 2020 provides our updated views of the pillars for investing – the economy, bonds, and stocks. As the headlines change daily, look to these pillars or trail markers, and the Midyear Outlook 2020 to help provide perspective on facing these challenges and preparing to move forward together.

Domestic Economy: The trajectory of the economic recovery remains uncertain, but based on the depth of the contraction, and a multi-staged recovery, our 2020 base-case gross domestic product (GDP) forecast calls for a 3 – 5 percent contraction in GDP.

Global Economy: We expect economies in Europe to contract more than the United States or Japan in 2020. After the pandemic ends, deficits and populism may continue to weigh on Eurozone growth. So far, China has led the way out of the global crisis in terms of containing the virus and reopening its economy.

Recession: The U.S. economy entered a recession in March 2020 as a result of the COVID-19 lockdowns and business closures. Although this recession may end up as one of the shortest on record, the eventual recovery may not be strong enough to get economic activity back to 2019 levels by the end of 2020.

Employment: Ongoing unemployment in industries that are more challenged because of social distancing may likely delay consumer spending’s return to 2019 levels until 2021.

Stocks: We believe the optimistic economic recovery scenario reflected in stocks may limit their upside potential for the rest of the year. Our 2020 year-end S&P 500 Index target range is 3,250 – 3,300, based on a price-to-earnings ratio (PE) of just below 20 and normalized earnings per share (EPS) number of $165.

Bonds: We expect interest rates to remain at historically low levels, but the direction may be higher for the rest of 2020. Our year-end base-case forecast for the 10-year U.S. Treasury yield is 1 – 1.5 percent, which would be the lowest level to end a year on record if realized.

Our expectations for a gradual economic recovery in the second half of 2020 appear to be in conflict with the S&P 500’s rapid ascent during the 12 weeks from March to June. On the one hand, gains may appear appropriate based on the likelihood that the recession – officially declared on June 8 – may be the shortest ever, aided by the massive stimulus response by policymakers and initial progress toward a vaccine.

On the other hand, the risk of a second wave of COVID-19 remains, particularly as some southern and western states have seen increases in infections and hospitalizations. In addition, some of the 20 million jobs lost in March and April, as reported by the U.S. Department of Labor, will take a while to come back due to social- distancing constraints and the potential for lasting changes in consumer behavior.

The uncertainty around these paths suggests stocks may have come too far, too fast. Although some recessions have seen stocks quickly recover bear market losses (1980, 1990), most of the time, the journeys back to record highs have taken a year or more.


Stock market valuations have become more expensive because earnings have fallen, which may bring volatility if the recovery disappoints. Using the 2021 consensus earnings estimate (source: FactSet) that we believe may be overly optimistic, the S&P 500’s PE ratio over 18 is above historical averages. However, low-interest rates make bonds a less-attractive alternative, while the absence of inflation, massive fiscal and monetary stimulus, and good prospects for a COVID-19 vaccine next year make these valuations tolerable. And we are hesitant to place too much emphasis on valuations given that, historically, they have not been good predictors of short-term stock market performance.


Our S&P 500 earnings forecast for 2020 is $120 to $125 per share. At the midpoint, earnings would drop about 25 percent from 2019’s level of $163, roughly in line with the average historical decline in recessions. This forecast reflects: 1) the severity of the decline in economic activity in March and early April, 2) the initial snapback in activity after many states began to reopen beginning in mid-April, and 3) growth headwinds that will constrain the trajectory of the recovery later this year.

The severity of the recession and challenges for businesses incorporating social distancing introduce downside risk to this forecast. However, the encouraging progress to date in reopening the economy and reluctance to shut down again may limit the downside.


We believe the optimistic economic recovery scenario reflected currently in stocks may limit their upside potential for the rest of the year. Our year-end target range for the S&P 500 is 3,250 – 3,300, based on a PE ratio of slightly below 20 and a normalized earnings figure of $165.

An annual earnings run rate like that may not be achievable until well into 2021. But with interest rates so low and the possibility of a COVID-19 vaccine, we are comfortable using a longer-term earnings target to value stocks here.

Although we believe stocks may have come too far, too fast in the short-term, for long-term investors, we continue to believe stocks may be more attractive than bonds. Historically, the early phases of bull markets have been accompanied by strong gains, which we think still leaves room for additional gains in the second half of 2020 and on into 2021. Our research dating back to 1950 shows that the historical average two-year gain for the S&P 500 coming off bear market lows has been 47 percent, leaving little room for additional upside. However, the bigger drawdowns have been followed by stronger two-year bounces, including the 96 percent bounce following the bear market in 2008 – 09, and 58 percent after the 2000 – 01 bear.

The path of the economy and markets in the second half of 2020 may depend on how much progress we make against COVID-19. If recent evidence of potential economic recovery is a prelude of things to come, and stocks are accurately assessing a favorable growth outlook, then stocks may rally to new highs in the second half. Alternatively, in the event of a second wave of infections and renewed lockdowns, the economic recovery may stall, and stocks may be ripe for a correction following the strong gains off the March lows.

When uncertainty is high, and markets are volatile, staying the course and focusing on the long-term can be difficult. We would continue to view bouts of volatility as opportunities, when suitable, to rebalance portfolios toward long-term allocations.

This COVID-19 crisis has been one of the toughest we will ever face. By facing these challenges together with many heroes at our sides, taking advantage of opportunities in the markets, and focusing more on long-term objectives rather than bumps along the way, we can make decisions that may put us in better positions to seek our long-term goals.

The LPL Financial Research team provided this information. LPL Financial is located in Chesterfield, Missouri. To view an interactive version of Midyear Outlook 2020, including a special election section, visit

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