Profit Growth Key for 2020 Stocks | Weekly Market Commentary | December 23, 2019

Clarity from the phase-one trade deal with China and United Kingdom election results could help shift stock market performance drivers more toward investing fundamentals in 2020. We expect stocks to appreciate in line with earnings growth next year, which justifies benchmark-like equity allocations in our view.


In 2019, expanding valuations drove gains for stocks; in 2020, we expect earnings to do the heavy lifting. Better clarity on trade may help drive increased business spending and more productivity, which we think will lead to stronger earnings growth in 2020. We are encouraged by the additional clarity companies now have as a result of the trade pact reached with China December 13.

We expect prospects for better earnings growth in 2020 to help support stocks at current valuations, as noted in our 2020 Outlook publication released earlier this month. Our 2020 year-end fair value target range for the S&P 500 Index is 3,250–3,300, which we base on a trailing price-to-earnings ratio (P/E) of 18.75 multiplied by our 2020 S&P 500 earnings per share forecast of $175. We believe mild inflation and still-low interest rates support these valuations, but we are not factoring in any expansion in stock valuations next year. Stocks are already near the low end of a range that we would consider fair value based on our 2020 earnings forecast. As a result, we would not consider adding equities to allocations already in line with appropriate benchmarks.


Corporate earnings growth has slowed considerably in 2019, as shown in [FIGURE 1]. The impact of the 2018 tax cuts created a difficult year-over-year comparison, global economic growth slowed, and tariffs and trade uncertainty weighed.

Corporate earnings growth has slowed considerably in 2019, as shown in [FIGURE 1]. The impact of the 2018 tax cuts created a difficult year-over-year comparison, global economic growth slowed, and tariffs and trade uncertainty weighed.

Improved clarity on trade makes forecasting economic growth and earnings for 2020 a bit easier, but the geopolitical environment still presents challenges. China trade tensions could flare up again as the countries work on a tougher “phase two” deal covering more contentious issues. The United Kingdom’s exit from the European Union (Brexit) may not be smooth, despite the convincing election win for Boris Johnson’s Conservative Party.

Our earnings estimate for 2020, which represents a mid-single-digit increase from our 2019 estimate, had already assumed some progress on trade. If we see a pickup in capital spending and improved productivity as a result of reduced tariff barriers and less trade uncertainty, we could potentially see some upside to that $175 number.


Geographically, the United States and emerging markets still stand out to us as relatively more attractive investment opportunities than developed international markets, based in large part on relatively stronger outlooks for economic growth and corporate profits.

Emerging Markets. Earnings for the MSCI Emerging Markets Index are expected to rebound solidly in 2020, with the consensus estimate (FactSet) calling for a 14% increase. That pace is nearly triple the forecast for Japan (5%) and ahead of Europe (9%) and the United States (10%). A possible double-digit increase in emerging markets’ earnings could be attractive to global investors, which may be a more likely scenario following the China trade deal. Disappointing earnings growth in these regions in recent years remains a concern, but we still believe a modest allocation to emerging markets equity makes sense in appropriate strategies. We are encouraged by the recent uptick in emerging markets’ earnings estimates and evidence of stabilizing global economic growth.

Developed International. Our concerns about global policies, economic growth, and interest rates drive our cautious outlook for developed international equities. Despite relatively attractive valuations, we see a number of challenges in developed markets that leads us to maintain our tactical underweight to the asset class. With the impact of any further monetary policy support likely to be muted, a coordinated move toward pro-growth fiscal policy would be needed for us to become more bullish on these regions. As a result, we would recommend that tactical investors consider focusing the majority of their equities allocations here at home.

Equity Positioning. Within U.S. equities allocations, we recommend a balance of the growth and value styles, with an emphasis on large cap stocks over their small cap counterparts as the business cycle moves into its latter stages.

We continue to prefer cyclical sectors as the U.S. economic expansion continues, and technology still leads this bull market. We expect industrials to benefit from a potential pickup in capital spending due to ebbing trade tensions. The challenging interest-rate environment prevents us from a more positive view of the financials sector for now, though we are encouraged by the recent steepening (un-inversion) of the yield curve, as long-term U.S. Treasury yields have risen faster than short-term Treasury yields in recent months. Finally, we are watching the healthcare sector for a potential upgrade due to the possibility that sector valuations reflect an overly pessimistic post-election policy environment.


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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

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