2020 Should Offer an Encouraging Environment for Stocks
Ebbing trade tensions and the effects of central bank easing should begin to stimulate global economic conditions in 2020.
To read the full article from Mike Gibbs and Joey Madere, CFA, see the Investment Strategy Quarterly publication linked below.
In 2020, we expect the trade war to simmer, the slump in U.S. and global manufacturing to improve, the global macro to benefit from central bank policy actions over the past year or so, while corporate profits will re-accelerate to the upside. All of the above paint a positive picture for the U.S. and global equities.
Despite our positive bias, we warn the path to equity gains will not be without typical periods of volatility, with global manufacturing stabilizing (as opposed to recovering). Also, setbacks with trade remain a possibility with adherence to final terms of the phase one trade deal necessary. After the nearly 30% gain for U.S. stocks in 2019, valuation leaves little room for multiple expansion, with the price to earnings (P/E) multiple over 19x trailing 12-month earnings. For this reason, the resumption of earnings growth is paramount to our theme.
- In 2020, we forecast S&P 500 earnings will grow to $174 per share. By applying a P/E multiple of 19.25, our base case is that the S&P 500 will rise to 3,350 by the end of 2020, approximately 6% above current levels.
- At the sector level, our view supports a pro-cyclical stance to allocations. We are overweight the Technology, Communication Services, Healthcare, Industrial, and Financial sectors.
- We maintain our generally positive stance to trade talks, but acknowledge that setbacks and volatility are likely to continue along the way.
- Low inflation, accommodative monetary policy, rebounding manufacturing, and a steepening yield curve are further supportive of equities.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Past performance may not be indicative of future results. The performance noted does not include fees and charges which an investor would incur. Investing in international securities involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small cap securities generally involve greater risks and are not suitable for all investors. Companies engaged in businesses related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Asset allocation does not guarantee a profit nor protect against loss. Dividends are not guaranteed and will fluctuate.