Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
2019 was a great year for equity markets (S&P 500 +31.5% total return), as trade progress and central bank easing provided a tailwind to valuation multiples through the sluggish economic and earnings backdrop. Headwinds from trade have abated, as a phase one trade deal between the US and China is expected to be signed in DC on January 15th. After which, discussions on phase two are set to begin immediately. There will likely be hiccups through the path of negotiations in 2020, but we expect President Trump to do enough to support the economy and market into his 2020 re-election campaign, even if it means "kicking the can down the road" on the more difficult, structural issues between the two countries.
The tailwinds of central bank easing in 2019, along with dampened trade tensions, are likely to support improved global economic conditions in 2020. We view the consumer as on solid footing, and believe global manufacturing trends should improve in the year ahead. Earnings are also set to accelerate from muted growth in 2019 (albeit off tough comps following tax reform in 2018). We look for 5.5% S&P 500 earnings growth in our 2020 base case scenario, using our year-end estimates of $174 and $165 in 2020 and 2019 respectively.
Trade progress, low inflation, low interest rates, potential for global manufacturing improvement, and earnings acceleration all support higher valuation multiples. However, while the current S&P 500 P/E of 19.9x is not euphoric, it is above our base case P/E multiple for 2020 of 19.25x. Therefore, we view the current valuation as neutral and believe forward market returns will need to come from earnings growth at this point. The market's recent price appreciation has come within 4% of our 2020 base case S&P 500 target of 3350, so risk/reward would improve in the event of a slight pullback.
The S&P 500 is a little extended in the short term (about 8.5% above its 200 day moving average), and a pause or normal consolidation would be healthy for the index to digest the strong gains that ended 2019. That said, intermediate term momentum remains solid. We believe pullbacks are likely to be light and should be used as buying opportunities. In the event of a pause or consolidation period with rolling sector rotation beneath the surface, we would look to accumulate favored sectors and stocks (i.e. Technology, Communication Services, Health Care, Financials, and Industrials).
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