Stock Market Outlook: Forecasts of Future Asset Class Returns

STO CK M A RK ET O U T LO O K
FOR E CASTS O F FU TURE ASSET CLASS RETUR N S

John Blank , P h.D.
C h ie f Eq u i ty Strate g ist, Zack s Investm ent Resea rc h
DE C E M B ER 201 8 /JANUARY 2 01 9
Zacks Investment Management

Born from Resea rc h, Built for Perform a nce
S T O C K M A R K E T O U T LO O K
TABLE OF CONTENTS
Commentary
1. Zacks December View on Equity Markets…..……....................................…….…3
2. U.S. Macro Outlook from San Fran Fed.……………………….................….….6
3. Zacks Forecasts at a Glance……………………..….................……………….…......8
Top-Down Zacks Rank

4. ZRS Chart of the Month..…………………………….............……………..........21
5. Zacks Rank S&P 500 Sector Picks.………..…….................…..…...…….................22
6. Zacks Rank December Industry Tables…….......…............................….…..…......23
Asset Allocation
7. December Buy-Side and Sell-Side: Consensus at a Glance…….…......................27
ZACKS INVESTMENT MANAGEMENT Page 2

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COMMENTARY
1. Zacks December View on Equity Markets

U.S. Markets
I must say it early this month, and say it well. The U.S. – China trade war has indeed bitten into U.S.
domestic stock market fundamentals.
During the first two months of Q4, analysts have lowered earnings estimates for most S&P500 companies.
Consistent with that, the Q4 bottom-up EPS estimate dropped by -2.6% (to $41.45 from $42.56) for the current
quarter, according to Factset.
How significant is a -2.6% decline in the bottom-up EPS estimate during the first two months of a quarter?
How does this decrease compare to recent quarters?
Consider these historical facts—
• During the past five years (20 quarters), the avg. decline in the bottom-up EPS estimate during the first
two months of a quarter was -2.4%.
• During the past ten years, (40 quarters), the avg. decline in the bottom-up EPS estimate during the first
two months of a quarter was -3.3%.
• During the past fifteen years, (60 quarters), the avg. decline in the bottom-up EPS estimate during the
first two months of a quarter was -2.9%.
Thus, the decline in the bottom-up EPS estimate recorded during the first two months of Q4-2018 was larger
than the 5-year average, but smaller than the 10-year average and the 15-year average.
However, Q4-2018 does mark the largest percentage decline in the bottom-up EPS estimate over the first two
months of a quarter since Q1 2017 (-3.2%).
At the sector level, ten S&P500 sectors recorded a decline in their bottom-up EPS estimate during the first two
months of Q4, led by the Materials (-10.1%), Utilities (-7.5%), and Industrials (-5.8%) sectors.
Here is what 3M and Caterpillar executives had to say on the effects of tariffs--
“If I fast forward a little into 2019, we think tariffs will be having a negative impact on our total sourcing cost.
There’s a number of things we’re doing around that; sourcing changes, supply chain changes, but also pricing
changes. And I’ll talk more about this on November 15th, but our view is we have approximately $100 million
headwind from tariffs and that our pricing will more than offset that, and raw material price increases into 2019.”
-3M (Oct. 23)
“In all, material costs were up about 2% on higher steel prices and the impacts of tariffs. Freight costs continue
to be elevated due to a variety of factors including being higher rates, less efficient loads, and expedited freight
costs as we ramp up production to meet increased demand. Even though the midyear price increase had only
a partial impact in the quarter, the drag of higher input costs and tariffs was just $50 million more than price
realization.” -Caterpillar (Oct. 23)
I am not seeing a recession, but it’s getting ugly out there for risk holders.

Z AC K S I N V E S T M E N T M A N AG E M E N T
My guess is this is a garden-variety valuation correction.
The markets bet big on a lot of wind --about the sails being full of tax cut air-- with growth in hand and beyond
the horizon. And it’s not happening.
The problem we have is this U.S. administration thinks solely thru the lens of a Zero Sum game. The winner
takes from the losers.
What are trade, investment, and business concepts generally? These are actually a set of positive sum games,
when played right. There can only be winners on each side of the table, or no deal, or alliance, or stream of
transactions can and will continue, over a long-term horizon.
Until that gets addressed in a meaningful way, I am afraid we stock investors must be resigned to Zero Sum
policy computations to global economic growth.
With U.S. growth up and non-US growth down, that equals no overall expansion progress. That is, assuredly, a
simple and straightforward solution to a very sideways growth outlook for the globe overall.
And the most cogent recipe I know of-- for zero YTD 2018 stock index returns.
What of 2019 returns? We shall see. A broad stock valuation re-set (nearing a year in length now) can be a good
setup for another broad leg-up and a share price recovery.
Global Markets
Next week, Britain’s politicians will gather in the House of Commons and cast what is likely to be the most
important vote of their careers.
Here is how news.au.com (an Australian news service) saw it on December 4th, 2018—
On December 11th, MPs in the 650-seat chamber will get their chance to approve or reject Prime Minister
Theresa May’s Brexit deal. Their decision will have far-reaching consequences.
So fragile is the British political scene, the outcome of the vote will usher in radical changes — the status quo is
the least probable outcome.
A defeat for Mrs. May would put her position in even more jeopardy. She has been facing calls to quit for weeks
and is said to be close to reaching the number of no-confidence letters required to trigger a leadership spill.
But exactly what will happen to her if the deal is voted down is not certain. Aside from taking responsibility for
the failure to get the deal through parliament and quitting, what happens to her will be decided by others.
She could go back to the European Union and ask for an improved deal, although they have already warned
there would be no more concessions. Several countries, including France, believe the UK got too easy a deal
in the first place, so it seems unlikely they will agree to another deal. But a no deal would be a disaster for both
parties, so it is possible she could return to Brussels and test their resolve not to renegotiate.
With Brexit day on March 29, 2019 rapidly approaching, what could happen next week?
NOT A GOOD START FOR MAY
Britain’s Parliament dealt Prime Minister Theresa May’s government two bruising defeats on Tuesday, even
before politicians began an epic debate that will decide the fate of Mr May’s European Union divorce deal - and

of her political career.
Opening five days of debate on the Brexit deal, Mrs May told Parliament that the British people had voted in
2016 to leave the EU, and it was the “duty of this Parliament to deliver on the result” of the referendum.
Despite her entreaties, the government appeared to be on a collision course with an increasingly assertive
Parliament over the next steps in the UK’s exit.
Minutes before Mrs May rose to speak, politicians delivered a historic rebuke, finding her Conservative
government in contempt of Parliament for refusing to publish the advice it had received from the country’s top
law officer about the proposed terms of Brexit.
The reprimand, by 311 votes to 293, marks the first time a British government has been found in contempt of
Parliament.
The PM lost three Commons votes - allowing MPs to take control of Brexit if her deal is defeated next Tuesday.
In a massive blow for the Prime Minister, MPs voted to hijack Brexit if her withdrawal agreement is defeated
in the Commons - as is almost certain. It means the Commons could order Mrs May to adopt a soft Brexit
strategy - or even call a second referendum.
WILL SHE STAY OR WILL SHE GO?
Mrs May doesn’t have a majority in parliament and would be vulnerable to a no-confidence vote tabled by the
opposition Labour Party. The party keeping her in power, the DUP (Democratic Unionist Party), are threatening
to abandon her, which substantially raises the prospect she will lose that vote.
But even that is not clear cut. The DUP have previously not wanted to risk having Labour leader Jeremy Corbyn
as prime minister, but now seem to view the Brexit deal as a greater threat than even him moving into 10
Downing St. Their continued support on confidence and supply cannot be assumed.
Oliver Wright, the policy editor at The Times, wrote yesterday Mrs May could bring this confrontation on and
call a confidence vote herself. That is high-stakes stuff and would force the DUP to choose.
If they sided with her, she could continue as prime minister without the axe hanging over her. Lose, though, and
she would have 14 days to try and cobble together a new majority. If that wasn’t possible, a general election
would have to be called.
IS TERESA MAY IN HER FINAL DAYS AS PRIME MINISTER?
She could always call an election without a confidence vote. The Fixed Term Parliaments Act means a three-
quarter majority would be needed for that to happen, but a snap election was achieved last year with little
difficulty and Labour are pushing for a new election anyway. The 2017 campaign was a disaster for Mrs May
and the Conservatives, however, and that pain will be fresh in her mind.
Mr Corbyn is expected to call for her to resign immediately if the vote is lost. He will argue the Brexit vote is a
de facto issue of confidence in the government as it is a major policy championed by the prime minister.
What she does could depend on how badly the vote is lost. If it is rejected by more than 100 votes, she could
quit. But so far she has shown remarkable resilience and an ability to fend off adversity to fight another day.

2. U.S. Macro Outlook-- San Francisco Fed “Fed Views”

Adam Shapiro, research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current
economy and the outlook as of November 9, 2018.
The economy has continued to grow at a solid pace. After a strong second quarter, real GDP grew at an
annual rate of 3.5% in the third quarter according to the advance estimate of the Bureau of Economic Analysis.
We forecast that GDP will grow at an annual rate of 2.4% in the fourth quarter and average 3.1% for 2018. As
monetary policy continues to normalize, we expect growth to gradually fall back to our long-trend estimate of
1.7%.
Reflecting a very strong labor market, the economy added 155,000 jobs in November. Monthly job gains
have averaged over 200,000 for the past six months, well above the amount needed to absorb the flow of new
workers into the labor force.
The unemployment rate stands at 3.7% as of November. We expect it to decline to 3.4% by the end of next
year as the economy continues to grow. Over the longer run, we expect the unemployment rate to gradually
return back to its natural rate of 4.6% as monetary policy accommodation is removed.
The yield curve continues to flatten as short-term rates rise while longer-term rates have remained
more steady. At the November meeting, the Federal Open Market Committee (FOMC) announced its decision
to keep the target range for the federal funds rate unchanged at 2 to 2.25% and is proceeding with the balance
sheet normalization process initiated last year.
Inflation reached the FOMC’s target of 2% this past summer. The personal consumption expenditure (PCE)
price index and the core PCE index both rose 2% over the last 12 months. As the labor market continues to
tighten, we expect inflation to slightly overshoot the 2% target by 2019.
Inflation can be driven by either aggregate or industry-specific factors. Price sensitivity varies by sector.
Prices in some sectors are more sensitive to overall economic conditions, while prices in other sectors are
more sensitive to industry-specific factors. For example, shelter prices tend to move with overall economic
conditions, whereas prices for health care services tend to follow public payment growth rates set by the
Centers for Medicare and Medicaid Services (CMS).
The recent rise in inflation to the 2% target was attributable to the sectors that tend to be more
sensitive to industry-specific factors, that is, acyclical factors. Acyclical inflation is now contributing 0.5 of
a percentage point more to overall core inflation than it was a year ago. The inflation rate for prices that tend to
be sensitive to the state of the economy, that is, cyclical inflation, has remained fairly steady over the past year,
despite an improvement in economic conditions.
Acyclical inflation is quite volatile, meaning it tends to move above and below its average level quite
rapidly. The contribution of acyclical inflation to core PCE inflation is currently relatively high, implying some
downside risk to the inflation outlook should this series revert back to its average level over the past 17 years.
Cyclical inflation, by construction, tends to move with overall economic conditions. The contribution
of cyclical inflation to core PCE inflation is now lower than what would be expected given the current level of
the unemployment gap. This implies some upside risk to the inflation outlook should cyclical inflation revert to
levels historically observed in very tight labor market conditions.
Overall, a decomposition between acyclical and cyclical factors shows balanced risks to the inflation
outlook. The median 10-year ahead personal consumption expenditure inflation forecast in the Survey of
Professional Forecasters has remained at 2%, showing that market participants view the risks to the inflation
outlook as balanced around the FOMC’s target.


3. Zacks Forecasts at a Glance

Top-Down S&P500 2018 Yearend Targets
A 2,800 index price level on the S&P500 appears to me to be a compelling benchmark. That is what seems to
be technical resistance now.
Do I think the S&P500 can get to 2,900 by the end of 2018? It is possible.
But it is equally possible we cannot break that 2,800 level, until the trade war with China is put to bed. That may
not happen for a very long time.
That is the predicament we find ourselves in: The latest PMIs out of China and India were pretty solid. And the
U.S. economy is doing fine. This share price struggle is more about the clouds of uncertainty hanging over 2019
than it is about the present state of any macro data, or earnings for that matter.
I looked into the sectors of the S&P500 this month. And I found only Health Care holding up. The Obamacare
expansion is the earnings support this sector is finding, that all other sectors are not benefitting from.
Elsewhere, it’s a classic valuation takedown, across the board. The S&P500 prices at 15.6X forward 12-month
earnings. That’s below the five-year average is 16.4. But above the 10-year average at 14.6.
The big fork in the road for the bears and bulls is the Fed meeting on Dec. 19th. Fed Chair Powell has to put the
brakes on more rate hikes, at this point. The chap in the White House is not going to change gears, so he and
the FOMC must change gears.
It’s that simple.

“.. we’re looking to 2684 (that’s the Powell Weds 11/28 low) as an important line in the sand ... [T]he bar is
higher for a durable advance to develop ... more convincing thrusts off the low are necessary to flip the tone of
the tape ..” – Strategas.
Given the shortness of time, an updated Zacks year-end target is at 2800 now. But I remain bullish overall on
stocks.
YTD returns are a paltry +1.0%. Here is what happened to annual S&P500 returns in year’s past. The annual
2017 S&P500 returns came in at +22.6%. In 2016, this U.S. benchmark rose +12%. In 2015, it rose a paltry
+1.4%. In 2014, it rose +14%. In 2013, the index saw the best of years this cycle, at +32%.
However, after Q3 earnings, a strong fundamental earnings growth story has stayed fully intact--
• The numbers so far y/y earnings growth rate for Q3-2018 is at +25.9%.
• If +25.9% is the actual growth rate for the quarter, it marks the highest earnings growth since Q3-
2010.
• All eleven S&P500 sectors reported y/y earnings growth.
• Nine sectors reported double-digit earnings growth, led by the Energy, Financials, Materials, and
Communication Services sectors.
• The numbers so far, y/y sales growth rate for Q3 is excellent at +9.3%.
• If +9.3% is the final growth rate, it will mark the 2nd highest revenue growth reported by the index
since Q3-2011, trailing only the previous quarter (+10.5%).
• All eleven S&P500 sectors reported y/y growth in revenues.
• Five sectors reported double-digit growth in revenues, led by the Energy, Communication Services,
and Real Estate sectors.
• Looking at future quarters, analysts see double-digit earnings growth for Q4, but see only single-
digit earnings growth for the first half of 2019.

20% annual EPS growth --via big U.S. corporate profit tax cuts-- stoked 2018 earnings.
Yet stocks are struggling. How did we get here?
The first part of the year shows us. In January, corporate tax rate cuts to 21% did get U.S. indexes to soar. A
month later, however, traders reckoned with the $1 trillion in annual U.S. fiscal debt to pay for it. Shortly after,
global Trade War rhetoric ramped up, after Cohn left the White House.
That got the S&P500 benchmark back to trading the Feb. 8th lows for 2018 of 2580. We danced around near
that level across late March and into early April.
Later on, in the summer and into the fall, broad U.S. stock indexes improved markedly, on record earnings
surprises, a positive look ahead, and a cyclical peak in share buybacks.
What likely stopped U.S. stocks from a back-to-back +20% returns year? The “China Trade War” remains the
biggest issue. Italian debt and the end of “QE” weakened Europe’s growth. Emerging Market stocks, bonds,
currencies got shorted. Their economies then suffered. So the U.S. markets price weaker revenues from
outside. Last year was synchronized global growth.
Success with a USA, Canada and Mexico trade deal puts the negotiation focus fully on China. November’s
U.S./China meeting in Buenos Aires was a muddle. Winning that contest may take 10 years. 10% China tariffs
have been put in place. 25% is down the road, if the agreed 90-day U.S./China negotiation period fails to
deliver.
Trade hostility via the White House limits multi-national investment into the USA, particularly by China. Raw
material users have felt tariffs on steel and aluminum in a number of key industries, like autos. Consider both
Ford and GM layoffs. Mueller seems to have criminal charges to announce, for some parties, and he has won
all cases so far. Presidential tweets to express alarm and gin up crazy policies don’t bring much comfort to the
markets.
We still need to keep an eye on rates too. A 3.23% rate on the 10-year Treasury occurred in early November.
I see 2.91% on my screen on Dec. 5th. Strong monthly U.S. payroll adds, a CPI forecast for +2.3% in 2019, a
FOMC Dec. 19th meeting prospect for a 25 bps rate hike, and the December finale to “QE” plans in Europe did
lift the 10-year above the 3.0% Rubicon. Then, risk-off smacked it down.
2018 global GDP was surprisingly soft. This needs to change to get the bull running. A new synchronized
pickup would get Asia, Europe, and USA economies pulling together. U.S traders should keep their eyes on
forward indicators of global growth, the regional PMIs I share later. However, world exports fell for the first
time in over two years, say the latest PMIs.
Mario Draghi may have missed an opportunity to stimulate European and global growth. In the face of the
U.S./China trade war, he has stayed too complacent. Across 2018, Draghi’s tapering of ECB “QE” bond buying
stimulus helped slow down European earnings growth and revenue expansion. He posted Dec. 2018 as the
date for a final “QE” exit. I think he should have re-considered, once the U.S./China trade war ramped up. And
he didn’t.
The other big kid on the global block did step to the plate. In summer and across the fall, China provided
domestic accommodation, cutting the Renminbi down -8% and lowering reserve requirements. It lowered an
auto tax. The Chinese government is bolstering its economy to survive this U.S. trade attack over a long time
horizon.
Emerging financial markets have borne the brunt of the trade war, so far, though Chinese shares got killed too.
The USA has the hot economy. So the FOMC stays on a quarterly rate hike course. A pause is possible,
perhaps if CPI data weaken, or Powell gets spooked about the trade war. We should see 1 more in 2018, in
December. Then perhaps 2 or 3 hikes happen in 2019. The neutral rate is at 3.0%.
How about energy demand and supply? WTI oil prices have collapsed to $53 a barrel. U.S. hostility towards
Russia, Iran and now Saudi Arabia remains unhelpful. This could build up the price per barrel again. Oil price
bears noted North American fracking reaching above 1000 rigs. New records in N. American production made
it the world’s leading energy production region. There may be WTI oil price upside from here. London energy
consensus sees WTI at $67 a barrel out to Dec. 2019.
What produces 2018 optimism?
Mainly S&P500 earnings growing +20% in recent quarters and 9% annualized revenue growth.
Trump confidence is a positive driver for half the electorate. Elevated stock prices and positive macro news
flow usually work together, though this year has been the exception. Luxury home prices support discretionary
consumer spending, for 20% of the population that own at the high end. A low 3.7% U.S. unemployment rate
keeps home loan default and other credit risks down for the rest. Rates are still low, particularly real rates.
Note: The U.S. has stronger growth and record profit margins vis-à-vis the rest of the world.
Underlying U.S. fundamental catalysts look both hot and cold --
• Aging demographics build up Medical Care demand, as do the Health Care exchanges.
• Business equipment & structures investment numbers have softened. We haven’t seen a major boom in
U.S. capital expenditures, while record share buybacks have been a major support for stock prices.
• The semiconductor IoT (Internet of Things) boom has major long-term bull implications. But chip stocks
got held down by short-term seasonal demand-supply imbalances. The hedge fund shorts feasted this
fall. The China trade war’s first real victims were chip stockholders, as electronics buying momentum
was struck down by the uncertainty.
In sum: factor in the profit tax cut and the latest +3.5% U.S. GDP growth numbers for Q3. That’s the bull case.
Softer revenue growth outlooks and higher interest rates have brought down U.S. share price overvaluation.
Meanwhile, hostile Trade War rhetoric killed off non-U.S. indexes in 2018. China’s ‘national team’ may revive
China shares. That would get all non-U.S. stocks to change course.
What’s alive for pessimists?
Big Tech was the sole easy 2018 returns story, and momentum traders chased them, until they didn’t. Trade
attacks on China --in particular intellectual property protection, and overvaluations killed those plays late in the
year. Without FAANG stocks, can the stock markets turn up? Maybe not! It’s hard to remember this. But Trump
has attacked Amazon, Facebook and Google, as monopolies. That could return too. The U.K. investigation in
FB looks awful too.
Domestic excesses --leading to a U.S. recession-- can arrive in an unpleasant and unforeseen way in as short
as 6 to 9 months. Consider the many real estate projects underway in top urban areas. Are they overbuilding?
Who put up the money? Where else to raise worry?
Into the yearend, traders price the full year of 2019 -- as they attempt to set fair value on stocks. There are big
risks lurking ahead. These can ramp up, big time.

Is it time to buy the U.S. in early December?
My answer is a qualified YES. It won’t be easy to stomach the volatility. That’s what you are going to have to do. I
wouldn’t criticize any patience, though, as a re-test of lows can happen.
Broad S&P500 valuation has fallen below the 5-year average. I do see stock-specific bargains to hunt down now.
The December 2018 S&P500 index trades at 15.6x forward earnings. The five-year S&P500 average is 16.4x. The
10-year average is 14.6x.
Zacks strategists (including me) stay bullish. We can see the S&P500 at a 3,000 level, but in Q1 or Q2
of 2019, not at yearend. There is a 5.7% chance of Q4-18 U.S. recession. Look to next year. This probability is
10.6% in Q1-19, 13.6% in Q2-19, and 19.1% in Q3-19. The point I am trying to make with these facts? The sec-
ond half of 2019 looks much more dicey.
• Bulls note cyclical U.S. upside in the Q3 earnings reports, 21% corporate tax rates, and peak share
buybacks. Q4-18 estimates are at +13.6%. Q3-18 earnings growth was +25.9%. Q2-18 finished at
+25.0%. Q1-18 recorded +24.6%. Q4-17 earnings were +14.8%. The ECB buys a few bonds thru Dec.
2018. However, the ECB, the Swedes & the BoJ likely keep on with negative deposit rates. Chinese
authorities have ramped up support for their economy. Some of that will leak out. All of these non-US
monetary authorities must stay super accommodative across 2019.
• Bears (-10% to -20% more downside) focus on U.S. rising bond rates and escalating trade wars. They
imagine bond rates in the USA pushed up, inexorably, under pressure from huge public U.S. Treasury
debt sales. They see the Dec. 2018 ECB end of bond buying and Fed rate hikes pressuring stock valu-
ations. Finally, note big negative returns on almost all international stock indexes. Feeding non-U.S.
negative sentiment are the currency markets. For example, a strong euro at $1.24 in spring is gone. The
euro trades at $1.135 on December 5th, staying near lows for the year. FX weakness shows capital flow-
ing to U.S. safe haven Treasury markets, due to downgraded growth and worry about a medley of risks
outside the USA. Emerging market currencies stay particularly awful.
• Range-bound sages note the 8.1% European unemployment rate is still high. 10-year U.S. rates did
exceed 3.2% this year. 3.0% has been the Rubicon to watch. Europe QE and Japan’s zero policy rates
keep the U.S. 10-year Treasury rate partly in check. Consumer inflation is just a tad above target. The
U.S. sees manageable wage growth. Low productivity gains in the USA are behind part of that. Non-
U.S. indexes offer strikingly better valuations. But they universally suffer from awful share price momen-
tum. There is nowhere to run to.
The positives: Trump corporate tax policy. An Obamacare enrollment boom continues. The U.S. 3.7%
unemployment rate is impressive. Low household unemployment and still relatively strong stock prices feed
cyclical consumer discretionary spending. Rates stay low.
The negatives: The economist consensus Q3-19 probability of recession approaches 20%. Trump is
unpredictable. Public deficits --above $1 trillion a year-- are a looming disaster. Many consumers feel satiated
and/or held back by rising rents and high home prices.
What of U.S. GDP growth? This should be a top-of-mind fundamental.
The Atlanta Fed NowCast has +2.8% for Q4-18. GDP growth sits at a final +3.5% for Q3-18. We have a final
+4.2% for Q2-18 and +2.2% for Q1-18.
• 2019 annual GPD growth consensus is at +2.7%.

• 2018 annual GDP growth consensus is at +2.9%.
• 2017 annual GDP growth at +2.2% was notably stronger than 2016 at +1.6%.
• Note: +1.0% in GDP growth over a year is when fears of a recession triggers selling.
“Assisted” +3.1% U.S. GDP growth is our call on 2018, diminishing to +2.3% in 2019.
Decelerating U.S. earnings growth combined with a low U.S. unemployment rate says: “Don’t worry
about a recession, worry more about an ongoing valuation pullback”.
• 2019 is at +8.5% annual growth.

• 2018 earnings have descended from ‘2-handles’. Q4 is presently estimated at +13.6%. Q3 is at +25.9%.
Q2 earnings finished at +25.0%. Q1 earnings were +24.6%.
• Q4-17 was +14.8%. Q3-17 was +6.4% EPS growth. Q2 gave us +10.3%.
• When did this serial earnings surge start? Earnings growth went positive in Q3-16.
Realize. This U.S. administration embellishes macro and stock market facts. There should be trader concern,
particularly on public debt, the weak international stock markets, the China trade war, presidential credibility,
and the lack of bipartisan policy making.
Nonetheless, the U.S. stays firmly on a record 115-month expansion. November added +155K jobs. October
added +237K jobs. September added +119K. August added +286K jobs. July added +165K jobs. June added
+208K jobs. May added +268K. April added +175K. March jobs tacked on +155K. February jobs were hot at
+324K. January job additions were +176K.
U.S. unemployment was 3.7% in November. This is 0.8% below ‘frictional’ or ‘natural’ unemployment. Solid
jobs additions, a slight distance beyond the ‘natural’ level of full employment, is a ‘tell’. Rising U.S. stock
indexes remain the base case for 2019.
In early December, Zacks Industry Ranks show the best opportunity in Health Care, Financials, and Info
Tech--
Health Care stays Very Attractive. The leaders are Medical Care and Drugs. The HMO stocks have been a
strong returns leader this year.
Financials rose to Attractive in December. The leader is Insurance, followed by Finance.
Info Tech is Market Weight. The Telco Equipment industry looks best, given a big 5G rollout. Semi industry
ranking are holding up, despite the deep pessimism on the cycle. The hedge fund short may be wrong about
the direction of this industry in 2019.
Unfortunately, Industrials fell to Unattractive in December. Two industry strong spots stayed alive: Aerospace &
Defense and Railroads & Trucking. There are intense shortages in finding truck drivers.
Annual S&P500 operating earnings numbers on deck look impressive. For 2019, the consensus sees the
S&P500 rocking $176.55. S&P500 earning for 2018 are steadying at $162.47. Most lift comes from the tax cut.
For a reference, 2017 S&P500 earnings ended at $133.08.
Tie on a 16.5 forward P/E to do “fair value” math. Then, 2680 on the S&P500 marks current low water mark for
“fair value” based on 2018 EPS. Looking forward, we should be trading on 2019 earnings. That forward “fair
value” is an S&P500 index at 2913. Can we get there by yearend? It’s doubtful, but do-able.
Now do this. Turn the P/E ratio on its head to attain a stock indexes’ earnings yield. Divide $176.55 in fresh
projected earnings for 2019 by an S&P 500 trading at 2700. That’s a 6.5% earnings yield.
Will annual returns be positive this year? I say yes, barely. Will we see +20% returns again next year? It can
certainly happen, but I would pencil in +5% to +10%. The number was +22.6% in 2017 and +12% in 2016,
+1.4% in 2015, +12% in 2014, and +32% in 2013. At this point, U.S. share index buying is all about looking
ahead – very, very bullishly, and factoring in more share buybacks.
Outside the USA, central bank support holds down long-term US risk-free rates: Europe keeps a small amount
of “QE” until Dec. 2018. But Japan and Europe will keep negative or zero deposit rates on well after Dec. 2018.
Their +2.0% consumer inflation targets are not in play. These two big macro players pin down long-term global
risk-free rates.
The “neutral” rate in the USA at 3.0% remains the destination for the Fed Funds rate in 2019. In early
December, the 2 to 10 year yield spread is down to just 15 bps – this is a tad lower than the 18 bps level seen
before the September Fed Funds hike.
The U.S. Treasury 10-yr rate was at 2.91% in early December 2018. It was at 3.16% on November 1st. 3.23%
was seen on October 5th. That is the 2018 high. A very low 2.08% was here in Sept 2017. A 1.80% rate was last
seen on Nov. 1st, 2016.
Historically, stock earnings yields are +3.0% above any 10-year U.S. Treasury rate. Meaning S&P500 stocks
should offer at least a 5.91% model return, given greater risks. After the selloff, they do manage that…with a
big corporate tax cut assist.
On Dec. 5th, the RUT trades at 1,480. Back on Oct. 2nd, the RUT was 1,672. Just before Labor Day, it hit a high
for the year at 1,733. This 2nd 2018 sell-off has been good news for shorts. At the Feb. 5th selloff low, the Russell
traded at 1491. I see the RUT trading in lockstep with the S&P500, whether that is up, down, or sideways.
“Risk-on” rallies usually show small cap and international stock indexes move together. International stocks
should have risen with the RUT index. A risk-on rally that includes international did not happen. And it likely
does not happen in the next 3 months, or until the US-China trade deal gets closed. If this doesn’t happen, all
bets are off.
My early 2019 trading call: The domestic stock rally returns, with U.S. political risk limited by a divided
government. International indexes need to see GDP growth ramp outside the USA. Then, international stocks
may have a big year, next year.
Zacks Outlook: Traders price full year 2019 to set fair value.
Full 2019 earnings matter after the fall.
• Always optimists, the “High End” bulls say the chance of a U.S. recession looks remote. Historically
high annual EPS growth supports a rally in large cap share indexes.
• High-End Bulls at Zacks use $176.55 in earnings for 2019 (and a 16.5 P/E ratio). This computes to an
S&P500 index at 2913. This is their target for fair value in 6 months.
• Low-End Bulls use the S&P500 2018 operating earnings of $162.47 and a 16.5 to get a fair value of
2680. That is near where we are on Dec. 5th. -10% corrections do happen.
Q4 earnings growth should be lower but good. Q3 and Q2 earnings growth looks to be a peak. Fundamentally
bullish earnings outlooks do continue in 2019, but they are relatively subdued.
The U.S. 10-year Treasury risk-free rate got above 3.1% in early November. A long-term bond rate rally is still
a strong possibility in the next 3 months and into 2019. Relative bond/stock valuations can deliver another
wakeup call. Broad asset allocation consensus can shift. Watch that closely! Cash is unequivocally better than
bonds.
In sum, U.S. stocks can deliver, lifted by positive earnings growth to the end of 2018 and into 2019. The Q4-

2018 quarter shows +13.6%. Annual 2019 earnings growth is at +8.5%.
Stocks can get closer to 3,000 early next year – as long as the U.S. risk-free bond rates don’t threaten. And
international stocks start to rally. This second point will be key.
I think an improved U.S. relationship with the Rest-of-the-World is the dominant factor!
S&P500 Earnings Outlooks
Consensus sees +8.5% in 2019 and +20.6% annual EPS growth in 2018, compared to +11.0% across 2017. In
2016, the S&P500 garnered a paltry +0.5%. 2015 was -0.8%. 2014 was +5.1%.
Consensus uses +5.6% for 2019 and +9.0% for 2018 as the latest revenue growth comps.
Q4-2018 is estimated at +13.6%. Q3 finished up at +25.9%. Q2-2018 finished at +25.0%. Q1-2018 came in
at +24.6%. Q4-17 was +14.8%. Q3-17 = +6.4%. Q2-17 = +10.3%. Q1-17 = +13.9%. Q4-16 marked +5.0% y/y
growth. The S&P500 EPS growth recession ended in Q3-16.
For 2018, S&P500 EPS growth is at +20.6%.
Nine of 11 S&P500 sectors assist with a double-digit EPS outlook – Energy (+111.9%), Materials (+30.3%),
rate-driven Financials (+25.3%), Communication Services (+22.3%), Info Tech (+15.4%), Industrials (+16.5%),
Consumer Discretionary (+17.3%), Health Care (+14.6%) and Utilities (11.9%), ranked in that order. Consumer
Staples (+8.8%) and Real Estate (+8.2%) are the two single-digit laggards.
At +8.5% EPS growth, 2019 should be a decent year.
A +20.9% EPS kick from Energy leads. Industrials are next at +11.1%. Consumer Discretionary shows an
above average +9.9% performance. Financials (+9.5%), Info Tech (+7.7%), Health Care (+7.2%) and the new
Communication Services (+6.5%) look solid, but are stuck with high single-digits. Materials (+5.5%), Utilities
(+5.0%) and Real Estate (+4.1%) are at the back.
Investors – Despite the more subdued marks, stay optimistic on full year 2019 EPS growth. As EPS drivers,
corporate tax cuts were a one-time event.
The Institute for Supply Management (ISM) told us the USA November PMI registered 59.3%, a increase of
1.6% percentage points from the October reading of 57.7%. Near 60 is stellar.
Comments from the panel reflect continued expanding business strength.
• Demand remains strong, with the New Orders Index rebounding to above 60 percent, the Customers’
Inventories Index declining and remaining too low, and the Backlog of Orders Index steady.
• Consumption strengthened, with production and employment continuing to expand, both at higher lev-
els compared to October.
• Inputs — expressed as supplier deliveries, inventories and imports — gained as a result of inventory
growth.
• Supplier delivery easing improved factory consumption as well as inventory growth, and import ex-
pansion was relatively stable. Lead-time extensions continue, while steel and aluminum prices are de-
clining.

• Supplier labor issues and transportation difficulties are at more manageable levels, but they con-
tinue to limit production potential.
“The expansion of new export orders was stable and at a recent historical low. However, four of six major
industries contributed, down from five in October. Prices pressure continues, but at notably lower levels than
in prior periods. The manufacturing community continues to expand, with November adding positively to the
three-month rolling PMI average,” says ISM Chair Fiore.
What ISM Respondents Are Saying
• “Shortages, longer lead times and capacity constraints [particularly in the electronic components
marketplace] and tariffs continue to strain the supply chain and disrupt normal business practices and
activities.” (Computer & Electronic Products)
• “Seeing a number [of] areas of slowdown that are concerning: truck market loosening [and] ISO depots full
of empty containers, all signs of decreasing business activity.” (Chemical Products)
• “Production continues at increased levels.” (Transportation Equipment)
• “Labor shortages in our area are affecting production volumes.” (Food, Beverage & Tobacco Products)
• “Trade tariffs and commodity increases have greatly affected our ability to remain competitive in the market.”
(Machinery)
• “Business [orders] steady. Many customers [moving] orders up due to price increases [from commodity
costs and tariffs].” (Furniture & Related Products)
• “Business remains strong. Tariffs impact is fully reflected in Q3 results, and initiatives are underway to move
work out of China into other low-cost countries.” (Miscellaneous Manufacturing)
• “A lack of experienced workers is having an impact on production, which impacts sourcing due to the skills
gap in the manufacturing trades; particularly computer numeric controlled machinists, but also assemblers
and welders. The challenge is meeting customer-delivery requirements for new and repaired equipment.”
(Fabricated Metal Products)
• “Steel tariffs continue to put upward pressure on downstream materials (even when sourcing steel
domestically). Long-haul trucking market seems to be normalizing after the implementation of the electronic
logging requirements. Oil volatility is also beginning to make its way through downstream materials.”
(Petroleum & Coal Products)
• “Continuing to increase imports in order to receive material in by the end of the year to avoid potential
25-percent tariffs.” (Nonmetallic Mineral Products)
The ISM November PMI indicated U.S. growth for the 115th consecutive month in the economy, and indicated
growth in the manufacturing sector for the 26rd consecutive month. Higher raw materials prices are in play for
33 consecutive months. Of 18 manufacturing industries, 13 reported growth in November.
How about non-U.S. earnings? S&P500 companies get over 43% of revenues from abroad.
2018 will surely see higher revenues from abroad.
Global Outlook
“Conditions in the global manufacturing sector remained lackluster in November. The J.P.Morgan Global
Manufacturing PMI posted 52.0, unchanged from October’s 23-month low as growth of output and new orders
remained below their respective long-run averages.
PMI readings signaled expansions across the consumer, investment and intermediate goods sectors. The
sharpest growth was seen in the first and the weakest in the latter. All three sub-industries saw output and new
orders rise.

Among the largest nations covered by the JP Morgan Global Manufacturing survey, manufacturing
business conditions improved in the USA, the Eurozone, Japan, China, the UK, Brazil and India.
Deteriorations were seen in South Korea, Italy, Taiwan, Mexico, Poland, Turkey, Thailand and Malaysia.
Production growth ticked higher in November, but remained among the weakest seen over the past two-and-a-
half years. Efforts to raise output were constrained by the relatively muted trend in new business. New orders
rose at a pace unchanged from October’s 25-month low, with international trade flows the main drag.
The level of incoming new export business fell for the third straight month in November. Developed nations
registered (on average) a marginal increase, as gains in the USA and Japan offset reductions in the euro area
and the UK. Emerging markets saw a reduction for the eighth straight month, mainly due to ongoing
declines in China.”
Europe
Europe sees +2.1% GDP growth in 2018 and +1.8% in 2019. The euro area unemployment rate reached 8.1%
in August, the lowest since November 2008.
November’s IHS Markit Eurozone Manufacturing PMI signaled the continued growth slowdown of the single
currency area’s manufacturing economy. Although remaining above the crucial 50.0 mark for a sixty-fifth month
running, the final PMI came in at 51.8 in November, down from 52.0 in October and the lowest reading since
August 2016.
Weakness was centered on the investment goods sector, according to market groups data. Capital goods
producers registered net falls in both production and new work. Export trade was also down for a third month
running, whilst cost pressures remained elevated. In contrast, solid growth continued to be recorded amongst
consumer goods producers.
Countries ranked by Manufacturing PMI: November Netherlands 56.1 25-month low Austria 54.9
2-month high Ireland 55.4 2-month high Greece 54.0 6-month high Spain 52.6 3-month high Germany
51.8 (flash: 51.6) 31-month low France 50.8 (flash: 50.7) 26-month low Italy 48.6 47-month low
The euro area’s ‘big-four’ economies posted the lowest manufacturing PMI readings of all countries
covered by the survey during November.
Most notably, Italy recorded a second successive monthly deterioration in manufacturing operating conditions,
registering its lowest PMI reading in nearly four years. France saw growth ease towards stagnation, whilst
Germany saw its weakest expansion in over two-and-a-half years.
In contrast, Spain saw a slight improvement in growth, whilst there were also stronger gains seen in Austria,
Greece and Ireland. The Netherlands continued to register the highest expansion, despite the pace of growth
slipping to its lowest in over two years.
Japan
For Japan, it looks like +1.1% real GDP growth in 2018 and +1.2% is forecast for 2019.
The headline Nikkei Japan Manufacturing Purchasing Managers’ Index (PMI) fell from 52.9 in October to 52.2 in
November, therefore pointing to a slower rate of improvement in business conditions. The latest reading for the
headline index was the lowest since August 2017.
Overall, growth in the sector was sustained, as has been seen since September 2016. However, the PMI was
in part pulled lower by a softening in demand conditions. New order growth eased in November to a mild pace
that was the joint-weakest in just over two years. A slower rise in sales to clients in foreign markets was also
recorded.
While inflows of new work from abroad were supported by other Asian markets such as South Korea
and Taiwan, weaker demand from China and Europe limited the expansion. As a result, Japanese
production growth moderated in November.
China
For China—
“November data pointed to a marginal improvement in Chinese manufacturing operating

conditions.
Companies signaled a slightly stronger increase in total new work, despite reduced amounts of export orders.
Production was meanwhile stable for the second month in a row. Relatively muted client demand and efforts
to lower costs contributed to a further reduction in staff numbers, while confidence towards the year ahead
remained subdued.
At the same time, inflationary pressures eased, with input costs increasing at the softest pace for seven months
and selling prices falling for the first time in a year-and-a-half amid efforts to
attract new business.
The headline seasonally adjusted Purchasing Managers’ Index was little-changed from October’s reading of
50.1 at 50.2 in November. This signaled a further fractional improvement in the health of China’s manufacturing
sector.
Chinese goods producers saw a slightly quicker, but still marginal, increase in total new orders during
November. Data indicated that weaker external demand continued to weigh on overall sales, as export
orders declined further midway through the final quarter. New business from abroad has now fallen in
each of the past eight months.
According to panelists, a combination of relatively subdued sales and stricter environmental policies meant that
production levels were unchanged for the second month in a row.
Workforce numbers continued to decline in November, with a number of firms commenting on softer demand
conditions and company downsizing policies. The rate of reduction was similar to that seen in October
and moderate. Nonetheless, this contributed to a further increase in the level of work-in-hand (but not yet
completed).
Reflective of the trend for new orders, buying activity rose only slightly in November. As a result, stocks of
purchased items expanded marginally, as has been the case in each of the past five months. Weaker than
expected client demand also led to the first increase in stocks
of finished goods for seven months.
Insufficient inventories of inputs at suppliers, alongside delays linked to environmental inspections, led to a
further deterioration in vendor performance in November.
Although purchasing costs continued to increase in November, the rate of inflation eased to a seven-month low.
At the same time, efforts to stimulate client demand led to a renewed fall in prices charged by manufacturers.
That said, the rate of reduction was only fractional.
Business confidence picked up from October’s 11-month low, but remained relatively weak in the context of the
series history. While some firms anticipate new products and stronger demand conditions to boost output, a
number of companies cited concerns over the impact of
strict environmental policies and relatively sluggish market conditions.”
India
India manufacturing sector growth has a modest 15-month expansion in hand. China production was little
changed, while India gained ground.
“The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose for the third consecutive month in
November, up from 53.1 in October to 54.0. The latest figure signaled the strongest improvement in the health
of the sector in almost one year.
Buoyed by stronger demand conditions and greater sales, manufacturers increased production at the second-
quickest pace since October 2016. The rise was led by intermediate goods firms, although robust growth was
also seen in the consumer and capital goods categories.
Likewise, new orders expanded at the second-fastest rate in over two years, slower only than that seen in
December 2017. Companies suggested that marketing efforts bore fruit, while stronger demand too boosted
sales. Intermediate goods makers also fronted the upturn.
The expansion in total new orders was supported by greater sales to international markets. Growth of
new export work quickened to the fastest in just under four years, as producers reportedly received
bulk orders from clients in key export destinations.
Heated demand exerted upward pressure on capacities, as highlighted by a renewed increase in outstanding
business. At the same time, manufacturers utilized their stocks to fulfill orders, with holdings of finished goods
down for the sixteenth month in a row during November.”
Other Asset Class Summaries
DJIA Similar to the S&P500, the Dow should recover into yearend. Both indexes sold off big early in February
and October. Earnings fundamentals still look excellent, with a singular focus on a historic tax cut rise in
estimates. The ‘bears’ look at bond rates and escalating Trump trade war uncertainty after midterms.
NASDAQ Stay positive on Into Tech. Follow the Zacks Ranks. 5 of 7 Into Tech industries have double-digit growth.
Yes. Q4-18 Info Tech earnings growth slows to 7.3%. But look back at the overall quarterly series. Q3 earnings
rest at +21.9%. Q2-18 was +26.6%. Q1-18 was +33.6%. Across 2017, IT tallied +16.9% EPS growth and +10.4%
revenue growth. In sum, Zacks #1 Rank IT stocks remain well worth buying.
AAPL stock is a disproportionate part of the QQQs. It is $176 in early December, down sharply from $216 on Nov.
1st. At the early 2018 sell-off --on Feb. 6th-- AAPL was $156. In early August, shares trade at $201. In early May
2018, shares traded at $176. Back in January 2017, AAPL was $120. Amazingly, shares priced at $90 a share in
May 2015.
The S&P500 and the QQQs can rise without AAPL. But an resurgence in this big stock (and the other FAANG
stocks) remains critical.

Russell 2000
Russell 2000 stocks lead – as markets go “Risk-on”. A 2019 “risk-on” rally can happen more easily if both U.S. and
global political risk settle down. The backdrop: Always be mindful of illiquid small cap shorting. In ‘Risk-off” periods,
shorts cut down unprofitable small caps -50%.
Fed Funds
Zacks call is for a one more December rate hike in 2018. We see 2 to 3 in 2019, and then the U.S. Fed arrives at the
‘neutral’ rate. The odds on when those 2019 hikes hit stays entirely data dependent. U.S. wage and inflation data is
more important than payroll adds.
Furthermore, the FOMC members will pause if stocks get hit too hard; if Trump does real damage to domestic GDP
accounts; in particular if/when U.S. exports fall too much.
10-yr Treasury
Above 3.0% happened this fall. Seeing that rate climb toward 3.5% is in play in early 2019. A 10-yr rate from +2.5%
to +3.5% showed the range I used across 2017. That is the same one I have now, in late 2018.
In 2019 and beyond, rising pressure from $900 to $1T in annual deficits surely pressures long-term rates to go up,
along with Fed rate hike plans, and clean signs of +2.0% consumer inflation.
The sole compression to long-term U.S. risk-free rates is a small amount of European “QE” tagged to end in Dec.
2018.
Corporate High Yield and Investment Grade Bonds
IG corporates offer the solid coupons. Less attractive risk-free rates drive corporate bond demand. Cash on
balance sheets remains impressive. Investors should own these bonds. However, a 3.5% to 4.5% total return may
be what is delivered this year. In our October 2018 poll, CIOs thought High Yield spreads would widen. IG spreads
would widen too, but they are likely to move less strongly.
Municipal Bonds
State tax efficient munis always look excellent for older income investors. Having written that, all bond classes get
pressured by rising Fed rates. Hold to maturity (on 5-year paper?) as U.S. rates rise. Note: In our poll, CIOs were
negative on munis in October 2018.
WTI Oil
Look for $65 to $70 a WTI barrel to come back, if OPEC announces cuts. London consensus has $67 a barrel in
Dec. 2019. Our oil price outlook is tied to OPEC, U.S. “fracker” rig counts, and any increase in global demand for
gasoline-at-the-pump.
Gold
Gold trades at $1236 in early November. My range-bound call holds. Gold prices fluctuate from $1200 to $1300 an
ounce. So I am a short-term range-trading buyer now.
Gold price upside hails mostly from higher consumer inflation. Also worry on financial contagion.

Gold price downside hails domestically from a low U.S. 3.7% unemployment rate, and externally, on improvements
in the global GDP outlook.
NOTE: About Zacks Rank Sector & Industry Forecasts Coming Up Next --
Zacks Research System (ZRS) updates the Zacks Ranking System regularly; and groups each company into three
aggregates. Each of the ranking aggregates still apply the standard proprietary Earnings Estimate Revisions
system, but they help sort things out within a top-down context.
Zack aggregates are:

- A 16 Sector grouping (versus the S&P500’s 10 sector groups),
- A 60 mezzanine grouping, known as “Middle” or Zacks M-Rank.
- And finally, a 250+ industry grouping, we refer to internally as the X- Rank.
The table in section 6, running four pages long, applied the consolidated ranking information from the 60-industry,
Zacks Middle, or M-Rank.
Industries titles listed along with the Zacks Middle Industries are S&P500 Industries, with revisions and additions to
reflect specific Zacks industries.

TOP-DOWN ZACKS RANK

4. ZRS Chart of the Month
Below: Sector Price to Earnings Growth (PEG) valuations over 3 years.
This data search was done on December 4th, 2018.
This shows us: S&P500 sector P/E ratios collapsed across the board in 2018.
Since Q1-2018 Price to Earnings Ratio (P/E) have sunk. We have P/E data for 9 of 10 S&P500 sectors. No data
was available on the Energy sector.
TOP: Communication Services had a 25.4 P/E ratio in Q1-2018. It is 22.11 now (the FAANG stock blowout
is apparent). Consumer Staples (not visible, in white) was 21.28 in Q1-18. It is 18.72 now. Consumer
Discretionary was 23.12 in Q1-18. It is 21.62.
MIDDLE: Info Tech was 19.36 in Q1-18. It is 17.82 now. Health Care is a bright purple and was 18.34 in Q1-15
and 17.0 in Q1-2018. Now it’s 16.6. Utilities were 18.77 in Q1-2018. They are 17.11 now. Health Care fell the
least in 2018. So buy Health Care? Yes. Tech is properly valued, given the higher growth? Likely, it’s a
yes.
BOTTOM: Industrials are rust red, and show a P/E ratio was 19.69 in Q1-18. Now its 15.53. Materials are
orange and were at 18.33 in Q1-18 (now it’s 14.6). Financials in bright orange were at 15.2 in Q1-18. Now it’s
11.95. These sector valuations are back to 2015 levels.
Wait for a rise in P/E values for Financials, Industrials and Materials? Yes. These value sectors are losing
ground, generally, as the Consumer sectors look weak.

5. Zacks Rank S&P500 Sector Picks

See the next four pages for all of the details…
Zacks December Sector/Industry/Company Telescope
If you want to understand the negative effects of the U.S. China trade war on earnings and revenue growth,
look no further than the December Zacks sector stories. The negatives pile up. Tariffs raise prices, so Consumer
Staples and Discretionary are hurting. Higher rates and high home prices depress Home-related industries. This
then spirals in the industrial suppliers.
Then, there is the oil price collapse, sucking the wind out of Energy and Materials sectors. Industrials are also
struggling, other than the ‘sugar high’ of Aerospace & Defense, and a solid performance by the Railroads.
(1) Health Care is Very Attractive. The leader is Medical Care. Drugs look good.
(2) Financials rise to Attractive. The leader is Insurance, followed by Finance.
(3) Info Tech is back to a Market Weight. The Telco Equipment industry looks best. Semis are looking OK too.
(4) Utilities are back to a Market Weight. The best is Electric Power, as the winter heating season is here.
(5) Energy is back to a Market Weight. The Energy-Alternates, Coal, and Pipelines look good. But the core Oil &
Gas plays are hurting, with oil prices collapsing.
(6) Industrials fall to Unattractive. The leaders are Aerospace & Defense and Railroads & Trucking.
(7) Materials are down to an Unattractive sector. The best is Metals-Non-Ferrous. Building Products/
Construction Materials looks the worst.
(8) Communication Services is Very Unattractive, but Telco Equipment is the opposite. It looks great, due to
the 5G-rollout investment.
(9) Consumer Discretionary is also a Very Unattractive sector. The worst is Electronics, Publishing, and Home
Furnishing-Appliances. That’s a tell.
(10) Consumer Staples is a Very Unattractive sector. The sole strong spot is Agri-business. The remaining
industries look poor, likely due to the U.S. China trade war tariffs.

6. Zacks Rank November Industry Tables

Zacks Forecasts for S&P 500 Industries
(As of November 30, 2018)
Very
Very Attractive Market Unattractive
Industry Portfolio (2.00 to 2.64 Attractive Performer Unattractive (3.21 or
Rating: Zacks Rank) (2.65 to 2.81) (2.81 to 2.99) (3.00-3.20) worse)
Consumer Staples Agri-business Tobacco (3.00) Food
(2.15) Food
VERY Food/Drug Retail Distributors
UNATTRACTIVE Hypermarkets & Packaged
Supercenters Foods
(3.04) (3.41)
Cons Prod-Misc. Beverages

Staples (3.25) Soft Drinks,
Soaps & Cosmetics Brewers
(3.09) Distillers &
Vintners
(3.45)
Consumer Media Consumer Other Cons Disc Electronics

Discretionary Movies & Autos/Tires/ (3.05) (3.43) found
Entertainment Trucks via: Internet
VERY Cable & Auto Retail, Apparel Retail
UNATTRACTIVE Satellite, Automotive Footwear, Computer &
Advertising Manufacturer, Apparel & Accessories, Electronics
(2.86) Tires & Rubber, Apparel Retail Retail
Auto Parts & (3.12) Photographic
Equipment Products
Distributors Leisure Service
(2.92) Casinos & Gaming Publishing
Hotels (3.58)
Non-Food Leisure Products
Retail/Wholesale Restaurants Home
Department (3.19) Furnishing-
Stores, General Appliance
Merch. Stores, (3.79)
Specialty Stores
(3.00)

Very
Energy Energy - Oil Misc. – (2.94) Oil & Gas – Integrated Oil & Gas
Alternate Sources (3.09) Drilling (3.47)
MARKET (2.21) Oil Exp & Prod
WEIGHT (2.95)
Coal &
Consumable
Fuels (2.61)
Oil & Gas Prod.

Pipeline (2.64)
Financials Insurance Invest Banking & Banks-Major
Insurance Brokering Regional Banks
ATTRACTIVE Brokers (2.85) Diversified Banks,
Multi-Line Other Diverse Financial
Insurance Banks & Thrifts Srvs. (3.04)
Life & Health (2.91)
Insurance Investment Funds
Property & Real Estate (3.05)
Casualty (REITs),
Insurance (2.36) Real Est. Mgmt
& Dev. (2.92)
Finance
Specialized &
Consumer
Finance (2.64)
Health Care Medical Care Medical
Health Care Products
VERY Distributors, Life Science
ATTRACTIVE Health Care Tools & Services,
Supplies, Health Health Care
Care Facilities, Equipment
Managed Health (2.90)
Care (2.40)
Drugs
Biotech,
Pharma
(2.63)

Very
Industrials Aerospace & Metal Machinery (3.07) Industrial
Defense Fabricating Products-
UNATTRACTIVE (2.28) (2.93) Business Products Services
Commercial Printing (3.27)
Railroads & Pollution Control Office Services. &
Trucking (2.98) Supplies (3.10) Conglomerates
(2.48) (3.60)
Airlines Construction –Building
Air Freight & Services (3.19)
Logistics
(2.98) Machinery
Electrical
Business S’vices Electrical Comp. &
HR & Equip.
Employment (3.19)
Services
Trade Comps &
Distributors
(3.01)
Info Tech Telco Electronic- Computer Computer-Office Electronics
Equip (2.11) Semiconductors Software- Equipment Electronic
MARKET Semiconductors
Services Office Electronics, Components
WEIGHT Semiconductor
Equipment Home (3.02) Equipment &
Electronic Entertainment Instruments
Manufacturing Software, Computer
Services Application Hardware,
(2.80) Software, Computer
Systems Storage &
Software, Peripherals
Internet (3.43)
Software &
Services (2.93) Misc. Tech
Data
Processing &
Outsourcing
Services
Consulting
& Services
(3.54)

Industry Very Attractive

Portfolio (2.00 to 2.64 Attractive Market Performer Unattractive Very Unattractive
Rating: Zacks Rank) (2.65 to 2.81) (2.82 to 2.99) (3.00-3.20) (3.21 or worse)
Materials Metals non- Steel (2.96) Paper Building Products/
Ferrous Paper Construction
UNATTRACTIVE Diversified Packaging Materials, (3.66)
Metals & Mining, Paper & Forest
Gold, Products, (3.02)
Aluminum,
(2.73) Chemicals
Fertilizers & Ag.
Chemicals
Industrial Gases
Specialty
Chemicals
Diversified
Chemicals
(3.06)
Containers &
Glass
(3.17)
Telecom Telco Equipment Telco Services
Services (2.10) Wireless Telecom
Services
VERY Integrated Telecom
UNATTRACTIVE
Services
(3.22)
Utility Telephone
(3.28)
Utilities Utilities Utilities –
Electric Power Water Supply
MARKET (2.96) (3.01)
WEIGHT
Utilities
Gas Dist.
(3.10)

ASSET ALLOCATION
7. December Sell-Side and Buy-Side— Consensus at a Glance
Sell-Side Consensus
Top-Down S&P 500 End-Of-Year Targets

Wall Street consensus foresees the following S&P500 outcomes in 2019--
Here are the 2019 outlooks from the major sell-side firms on Wall Street…
S&P500 YoY
Banks YE Price Increase Comments
Tax cut boost fades and risk of yield curve
Credit Suisse 3,350 11.7% inversion exists, but earnings and economic
growth should propel stocks.
Earnings, credit conditions still support limited

Citigroup 3,100 10.7%
market upside appreciation potential.
Bull market continues, but cash ‘a competitive

Goldman Sachs 3,000 5.0%
asset class to stocks’.
Bank of
America/Merrill 2,900 -3.3% ‘Elevated likelihood’ of peak S&P500
Lynch
Baking two Fed rate rises, a stronger US dollar
RBC Capital N.A.
2,900 and moderating margins into EPS forecast.
Markets
Expects trading range of 2,400 to 3,000 ‘modest

Morgan Stanley 2,750 -1.0%
preference’ for large caps over small caps.
The Zacks view difference? We are somewhat more bullish on 2019 as this sell-side consensus. The S&P500 will
reach a bit over 3,000 by YE 2019.
Other Sell-Side Views
The “Equity Risk Premium” is an excess return the overall stock market provides above a risk-free fixed income
rate. This excess return compensates investors for taking on the relatively higher risk of equities.
In 2018, Sell-side strategists believed the equity risk premium were a positive force for stocks, given the tax
changes. Bullish sell-side strategists measured the S&P 500 equity risk premium at 6.5% in late 2018. +4.2%
is the average in the recent past. For a cyclical reference, it was +6.2% in 2013 and 6.0% in 2014. It peaked at
7.4% during 2012.
If low LT rates stay relatively low to yearend, an arbitrage incentive is there is to buy stocks. 3.16% was here in
early November. 2.92% was here in early June, after a run to 3.10% in May 2018. 2.85% was here in March and
February 2018.

Bottom-up S&P 500 Earnings
Consensus calls for single digit EPS growth tied to stronger U.S. and global real GDP growth across 2018.
Bottom-up consensus forecasts on EPS growth for individual companies in the S&P 500 index expect growth
of +8.5% in 2019 and +20.6% in 2018 after +11.0% in 2017 vs. +0.5% in 2016 and -1.1% in 2015.
The Zacks view difference? We agree. 2018 did achieve outstanding nominal S&P500 earnings growth, on
corporate tax policy alone. That was an historic change. However, the global economy was been cut down by
the trade wars.
With low double-digit expansion in earnings and strong y/y revenue growth, markets look less confidently into
2019. Zacks concurs. Early 2020 is where a U.S. recession, to wring out excesses, may lie.
Top-down S&P 500 Earnings
Top-down strategists, who track macro forces and apply top-down judgment to forecast S&P 500 earnings,
look for around +20.6% growth in 2018 -- after +11.0% in 2017. This is a bounce from +0.5% EPS growth in
2016 and -1.1% earnings growth in 2015. In some sense, this big EPS surge is a ‘catch-up’ from the all but
forgotten earnings recession.
U.S. GDP growth can mark above +3.0% GDP growth for 2018. Consensus has +2.9% for 2018 and +2.6% is
penciled in for 2019. The U.S. garnered +2.3% in 2017, +1.6% in 2016 and +2.6% GDP growth in 2015.
Small Cap, Mid Cap, and Large Cap stocks
The first half of 2018 gave up outperforming returns on small and mid caps. October 2018 CIOs forecast returns
for small and mid caps at a +5 to +10% annual return, with better sentiment than large caps, at 0 to 10%. Value
is better than growth for large and mid caps. Small cap growth is better there.
Fed rates, U.S. Treasury debt sales and Trump trade unpredictability mark points of worry for bears. Brexit and
tapering of Europe QE (put off by Italy now?) get focus outside the U.S.
The Zacks view difference? Stay bullish on U.S. small cap growth indexes. However, focus on either style in
U.S. large and mid caps. Large caps outside the U.S. are trickier. A rotation into them can be imagined, but
only if GDP growth picks up there.
Buy-Side Consensus
S&P 500 and Russell 2000
Our in October 2018 survey-- buy-side consensus came in at 80% positive vs. 80% positive in May 2018 (for
reference, this was 74% in October, 88% in April and 85% in January 2017).
Looking further back, sentiment marked a turn up in 2016. 45% of CIOs were positive on the S&P500 in
October 2016 (before the election), versus 63% in July 2016 and 77% in March 2016.
In October 2018, 0% expect worse than -10% returns. 14% expect -5% to 0% returns. 40% expect 0 to +5%
returns in 12 months. 27% expect +5% to +10% returns over the next 12 months; 13% expect 10 to 15%
returns. 0% of CIOs expect large cap S&P500 returns to be more than +15%.
Back in January ’17, the CIO mode called for 0% to +10% returns (ditto April 2017).

Small cap Russell 2000 returns deliver a better returns profile the next 12 months. The small cap mode is for the
same 5% to +10% returns. I note a more positive bias.
S&P 500 and Russell 2000: Value or Growth
The October, May, and Feb 0218 surveys, and October, August and April 2017 surveys show a buy-side preference
for value over growth stocks in the large cap space. The same consensus is there on small and mid caps the next
12 months.
Fed Funds
CIOs saw Fed rates out 12 months from now in our latest survey –as 200 to 250 bps.
(0%) in the October 2018 survey showed the buy-side thinks the Fed Funds rate will be 0 to 100 basis points in 12
months. (7%) think 100 to 150 basis points. (7%) think 150 to 200 bps. (60%) of CIOs see 200 to 250 bps. (20%)
see 250 to 300 bps (7%) 300 to 350.
The CIO mode for the 5-year U.S. Treasury rate is 250 to 350 bps (87%). The 5-yr rate was 298 basis points on
Sept. 24th. This rate was 268 basis points on May 31, 2018. It was 254 basis points on Feb. 5, 2018; 203 bps on
Oct. 27 and 180 bps on August 1, 2017. It was 129 bps on October 25th, 2016; 135 bps on March 21, 2016; and162
bps on January 12, 2016.
10-yr Treasury
In October 2018, the mode of (50%) CIOs in our survey think the 10-year Treasury rate is likely to range between
+3.0 to +3.5% in 12 months time. About 27% of calls are lower. Zero CIOs saw 0.5 to 1.0%. 7% saw 1.0 to 1.5%.
Zero CIO saw 2.0 to 2.5%. 20% are 2.5 to 3.0%. 47% are 3.0 to 3.5%.
For reference, long-tem risk-free rate outlooks were lower in CIO surveys in 2015 and earlier. For 2015, it was 1.5 to
2.5%. For 2014, CIOs saw a higher range of 2.5 to 3.5% rates. In 2012 and 2013, the consensus 10-yr. rate floated
between 1.5 and 2.5%.
Corporate High Yield and Investment Grade Bonds
In the October 2018 survey, 87% of CIOs expected high yield (HY) spreads to expand.
What of late 2017 CIOs? There was similar concern. HY spreads had come in too much. There needed to be a
pullback/correction, in their minds.
Corporate Investment Grade credit spreads should widen to YE 2018 too.
Municipal Bonds In the October 2018 survey, 40% gave this security a bearish nod and 46% were neutral
Look back. In October, August, and April 2017 and in Jan and Oct. 2016--munis got a neutral to bearish nod too.
Fed rate hikes and debts piling up via bigger U.S. deficits are major concerns in 2018.
WTO Oil and Commodities GSCI Index October 2018 is “market-perform” on Oil prices.
The Oct 25th, August, and April 2017 surveys, were neutral on Oil too. Further back, Jan. 2017 was bullish Oil.
Commodities stayed neutral in May and Feb. 2018, similar to October, August, April and Jan. 2017 & Oct. 2016.
Look back to March 2016 for when commodities looked bullish.
Gold 40% of CIOs were Market Perform in October 2018 (the mode). The same CIOs were likely on Market Perform
in Feb and May 2018 too.
Oct and August 2017 12-month outlooks were at Market Perform. Earlier, in April and Jan. 2017, Gold looked bullish
to CIOs. This was due to rising inflation worry early in the year. That inflation worry disappeared.

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Stock Market Outlook: Forecasts of Future Asset Class Returns

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STO CK M A RK ET O U T LO O K

FOR E CASTS O F FU TURE ASSET CLASS RETUR N S

Zacks Investment Management

Top-Down Zacks Rank

ZACKS INVESTMENT MANAGEMENT Page 2

1. Zacks December View on Equity Markets

Consider these historical facts—

ZACKS INVESTMENT MANAGEMENT Page 3

My guess is this is a garden-variety valuation correction.

NOT A GOOD START FOR MAY

ZACKS INVESTMENT MANAGEMENT Page 4

of her political career.

WILL SHE STAY OR WILL SHE GO?

IS TERESA MAY IN HER FINAL DAYS AS PRIME MINISTER?

ZACKS INVESTMENT MANAGEMENT Page 5

2. U.S. Macro Outlook-- San Francisco Fed “Fed Views”

ZACKS INVESTMENT MANAGEMENT Page 6

ZACKS INVESTMENT MANAGEMENT Page 7

3. Zacks Forecasts at a Glance

It’s that simple.

ZACKS INVESTMENT MANAGEMENT Page 8

Yet stocks are struggling. How did we get here?

What produces 2018 optimism?

Underlying U.S. fundamental catalysts look both hot and cold --

What’s alive for pessimists?

ZACKS INVESTMENT MANAGEMENT Page 10

Is it time to buy the U.S. in early December?

What of U.S. GDP growth? This should be a top-of-mind fundamental.

• 2019 annual GPD growth consensus is at +2.7%.

• 2019 is at +8.5% annual growth.

Financials rose to Attractive in December. The leader is Insurance, followed by Finance.

ahead – very, very bullishly, and factoring in more share buybacks.

Full 2019 earnings matter after the fall.

ZACKS INVESTMENT MANAGEMENT Page 13

2018 quarter shows +13.6%. Annual 2019 earnings growth is at +8.5%.

S&P500 Earnings Outlooks

For 2018, S&P500 EPS growth is at +20.6%.

At +8.5% EPS growth, 2019 should be a decent year.

Comments from the panel reflect continued expanding business strength.

ZACKS INVESTMENT MANAGEMENT Page 14

ZACKS INVESTMENT MANAGEMENT Page 15

“November data pointed to a marginal improvement in Chinese manufacturing operating

Other Asset Class Summaries

ZACKS INVESTMENT MANAGEMENT Page 18

Corporate High Yield and Investment Grade Bonds

ZACKS INVESTMENT MANAGEMENT Page 19

Zack aggregates are:

ZACKS INVESTMENT MANAGEMENT Page 20

TOP-DOWN ZACKS RANK

ZACKS INVESTMENT MANAGEMENT Page 21

5. Zacks Rank S&P500 Sector Picks

(2) Financials rise to Attractive. The leader is Insurance, followed by Finance.

ZACKS INVESTMENT MANAGEMENT Page 22

6. Zacks Rank November Industry Tables

Cons Prod-Misc. Beverages

Consumer Media Consumer Other Cons Disc Electronics

ZACKS INVESTMENT MANAGEMENT Page 23

Oil & Gas Prod.

ZACKS INVESTMENT MANAGEMENT Page 24

ZACKS INVESTMENT MANAGEMENT Page 25

Industry Very Attractive

ZACKS INVESTMENT MANAGEMENT Page 26

Earnings, credit conditions still support limited