Our 2020 Outlook: Still Bullish After All These Years

Key Takeaways

• We initiate a year-end 2020 price target for the S&P 500 of $3,500, or 20x our 2020 earnings estimate of $175.
• Last week’s phase one agreement between the US and China along with the Congressional compromise on USMCA establishes a platform from which equity markets can move higher in 2020.
• We expect monetary policy to remain supportive of the US economy in 2020.
• We see room for higher valuations in the new year but believe significant focus will be placed on corporate earnings growth as trade war uncertainty is reduced further over the next phases of negotiations.

We initiate a year-end 2020 price target for the S&P 500 of $3500 and an earnings projection of $175.

The fourth quarter of 2019 thus far has produced a decidedly different effect on stock prices than what occurred in Q4 2018 aided and abetted this year by better than expected revenues and earnings trends, stronger oil prices, resilience in economic data, and the failure of negative projections from some corners of the market to carry much weight with market participants.

In our view, greater clarity and improved communication from the leadership at the Federal Reserve have contributed significantly to the equity market’s buoyance this year notwithstanding challenges from politics, geopolitics and the process of trade negotiations.

In addition, the counter-inflationary cyclical and secular trends embedded in technology and globalization continue to provide monetary policy makers with more than just a little “wiggle room” to be flexible in setting policy in an otherwise challenging environment.

That said, we do not attribute the US equity market’s positive performance in 2019 solely to monetary policy. We would also credit the financial stimulus that remains from tax reform, which enables many companies to keep more of what they earn, thus leaving them more capable to invest and grow their businesses and weather future economic uncertainty.

As we go to press with our 2020 price target and earnings projections for the S&P 500, a degree of uncertainty related to the risk of no deal with China appears to have been removed—the phase one deal announced two trading days ago offering some reassurance to investors as well as corporate leaders.

In our view, the change in status of the trade war by virtue of a phase one agreement in principle presents an opportunity for markets to move higher near term and on further news of progress related to the phase one process (the final hammering out of details before it’s signed) and the further “phases“ that are likely to follow.

This is not a “heaven on earth” solution by any means but rather a hard-earned achievement by both parties to move beyond the tariff war and toward a practical solution for both sides. Such a process augurs well for both the American and Chinese economies as well as those of their trading partners in a world inexorably linked by global trade relationships.

So far, equity market gains since the September 20, 2018 peak through today do not suggest to us the presence of animal spirits or irrational exuberance but rather an “about face,” and an acknowledgement (in hindsight) that it wasn’t so much a deterioration of economic or business fundamentals in Q4 of 2018 that dragged the S&P 500 down nearly 20%, but rather an overblown misinterpretation of economic slowing related to the trade war, monetary policy, and a ramp-up in oil production initiated by OPEC.

In such context, we do not see 2019 as having been a “banner year” for the S&P 500 but rather as a solid “do-over year” in which the equity market worked its way back to where it had been on September 20, 2018 with an additional modest gain for good measure.

While the number of uncertainties may have somewhat dwindled, risks naturally remain and can be expected to emerge from time to time creating intermittent market volatility.

Among the risks that might emerge, we’d include:

• Risks in the negotiation of complex and difficult economic issues if either or both sides were to walk away from the table. We believe the cost of failure to negotiate a resolution is too great and impractical for both sides from an economic and political perspective.
• Market melt-up and subsequent overvaluation leading to a correction; this can occur when bears and skeptics capitulate and “everyone crowds to one side of the boat.” Ironically, this sort of situation can also offer opportunity for investors with longer-term perspectives to “buy the dip.”
• A misstep in monetary policy to the detriment of the markets;
• Risks of further trade fracases, whether with Europe, non-China Asia, or Latin American countries.

We see 2020 as a year that will be defined by a reassertion of global growth as the negative overhang affecting the global economy and markets is lifted as progress is made gradually in the “phases” that we expect lie ahead.

From current levels, a price target of 3,500 in our view appears attainable for the S&P 500 in 2020 considering the strengths and resilience of the US economy, a potential improvement of the global economy tied to lessening of tensions that have impeded economic progress over the past 18 months, and the capability of the Federal Reserve to navigate uncertain waters.

With this reassertion of economic and earnings growth at an improved (if not robust) pace, we believe a multiple of 20x next year’s earnings is attainable as we expect corporate earnings to reach $175 per share. These assumptions underlie our target price of 3,500 for the S&P 500.