Wall Street is predicting that the record-setting US stock market rally will continue next year, supported by the Federal Reserve’s accommodative interest-rate policy and a resilient domestic economy.
But strong gains this year may have stolen the market’s thunder for 2020, while the US presidential election and US-China trade talks risk causing fresh volatility, according to analysts and strategists from the major US investment banks.
The benchmark S&P 500 (.SPX) is on track to close this year up roughly 25 per cent, its best performance since 2013 and the third-strongest annual gain since the start of the century.
Hopes of at least a partial US-China trade pact and the Fed’s three rate cuts this year have aided the market’s run to fresh record highs in the final quarter of 2019.
That has led US investment banks to positive, albeit muted, forecasts for the new year: The average price target for the S&P 500 in 2020 stands at 3,278 — an 4.6 per cent increase from the current level — based on forecasts from eight major banks.
This time last year, forecasters were too cautious, bracing for an economic slowdown after the Fed had raised rates and the stimulus from tax cuts faded. Goldman Sachs (GS), for instance, lowered its recommended allocation to stocks and added that cash should represent a competitive asset class to stocks “for the first time in many years”.
Cash is the lowest-returning asset class so far this year. Goldman has since taken a more bullish view and set a price target of 3,400 on the S&P 500 for the end of 2020.
JPMorgan’s chief US equity strategist, Dubravko Lakos-Bujas, has the same 3,400 target, which would be a 9 per cent gain from the current level. “Easier monetary and fiscal policies are in motion globally with majority of the benefits expected to flow through the economy in the coming quarters,” he wrote in a research note.
Global business sentiment should start to heal and investment activity should improve as fears related to US-China trade, Brexit and other one-off shocks to large economies fade, Mr Lakos-Bujas added.
Credit Suisse (CS) has emerged with the most bullish prediction among the major banks, expecting defensive sectors to lag and instead favouring technology, consumer discretionary, financial, industrial and material stocks.
“However, with the S&P 500 up roughly 25 per cent in 2019, we expect limited gains from current levels,” the bank said. It is forecasting an end-of-2020 level of 3,425.
Earnings are expected to be a catalyst for some stock market gains. According to Refinitiv, which tallies estimates across Wall Street, analysts forecast earnings per share for the members of the S&P 500 to be up 10 per cent next year from the current estimate for 2019.
Morgan Stanley (MS) is less optimistic. The bank said it was forecasting “little to no earnings growth, as overall growth remains slow and margin pressures persist”. Its 3,000 target implies a 4 per cent fall for the S&P 500. UBS Global Wealth Management estimates a year-end mark of 3,200.
“At this stage, we could see growth surprising to the upside or the downside, depending on a number of potential outcomes on trade and rates. After the recent rally, equity markets are now pricing a modest recovery, so upside is limited,” the bank said.
The trade dispute with China and the US presidential election are two of the biggest wild cards in the market, according to Darrell Cronk, president of the Wells Fargo Investment Institute.
“Not surprisingly, we expect elevated 2020 election rhetoric and have low expectations for major fiscal or legislative changes,” he said. “Fortunately, a look at history shows that presidential election years have generally produced positive equity results.”
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