Key changes from May’s report:

• Upgrade Value from Neutral to Positive, Downgrade Growth to Negative from Neutral.
• Upgrade Industrials from Neutral to Positive, Downgrade Technology to Neutral from Positive
• § Upgrade Developed International from Negative to Neutral, Downgrade Emerging Markets to Neutral from Positive.

We expect stocks to continue to grow into their valuations on the back of tremendous earnings momentum as the economy fully reopens, vaccine distribution continues, COVID-19 cases plummet in the United States, and stimulus spending continues to work its way through the economy. As economic growth accelerates, we believe conditions will remain favorable for cyclical value stocks to continue their recent run of outperformance.

Our S&P 500 earnings per share forecast for 2021 is $187.50 to $190, and our 2021 year end S&P 500 fair value target range is 4,400—4.450. After a nearly 90% gain since the March 2020 lows, the S&P 500 may be due for a pause, consistent with the second years of post-WWII bull markets that were characterized by increased volatility. Key risks include COVID-19 spread outside the United States, inflation, rising interest rates, higher taxes, and geopolitics.

INVESTMENT TAKEAWAYS

• Our equities recommendation remains overweight. We continue to favor stocks over bonds based on our expectation for a very strong economic and earnings recovery in 2021, supported by the full reopening of the U.S. economy and massive fiscal and monetary stimulus.

• As the economic recovery progresses in 2021, we would expect cyclical value stocks to lead. Our favored sectors—mostly on the value side of the ledger—include financials, industrials, and materials.

• Our positive view of small caps is supported by the early-stage bull market and economic expansion and strong earnings. Valuations appear reasonable and recent weakness creates a potentially attractive entry point.

• After upgrading our international developed view and downgrading emerging markets (EM), our regional views are aligned at neutral.

• U.S. stocks enjoy a better economic growth outlook than developed international, but better value-style performance may enable international stocks to match U.S. returns.

• Geopolitical and regulatory threats and a shrinking economic growth advantage have left us with less conviction on EM.

• We continue to recommend an underweight allocation to fixed income. Although we’ve seen a big move higher in rates this year, Fed policy and manageable inflation may limit the risk of further large moves in the near term. Higher rates may still put some pressure on bond returns while economic improvement may help support equities going out a full year.

• We favor a blend of high-quality intermediate bonds that is underweight U.S. Treasuries with an emphasis on short-to-intermediate maturities and 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-toearnings 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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