uploads/2019/11/sp-500-TARGET.jpeg

S&P 500 at Record Highs: Not Much Upside in 2020

By

Updated

The S&P 500, the Dow Jones Index, and the Nasdaq Composite Index are trading near their all-time highs. While the indices closed down slightly on November 22, they’re near their record highs. However, the levels might be as good as it gets for the markets. In general, analysts don’t see much upside for markets in 2020.

Article continues below advertisement

S&P 500 at record highs

US stock market indices including the S&P 500 (SPY) and the Dow Jones Index (DIA) are trading near their all-time highs. Notably, after the sell-off in the fourth quarter of 2018, most economists were bearish for 2019. However, markets are having a strong run this year. Based on last week’s closing prices, the S&P 500 and the Dow Jones have risen 24.0% and 19.5%, respectively, for the year. The Dow’s relative underperformance is partially due to Boeing (BA)—its biggest constituent. Earlier this year in Key Themes to Watch after a Dismal 2018, we noted that the 2019 stock market outlook isn’t as bearish as analysts’ consensus view.

Can markets reach fresh highs?

While stock markets are hitting new records, there are a few things to consider. First, the record highs are only slightly above the highs that we saw last year and earlier this year. Second, a large section of the market is betting on a market crash next year. While the S&P 500 and the Dow Jones are at a record high, the rally hasn’t inspired much confidence. Occasionally, the recession brigade bets on a 2020 recession. While a recession doesn’t look imminent based on available information, the risks have been rising as the decade long economic expansion continues. Read Could Slowdown Talks Lead Us into a Recession in 2020? to learn more.

Article continues below advertisement

Expect a flat S&P 500 next year

Meanwhile, after a strong year so far, Wall Street analysts aren’t too optimistic about the 2020 outlook. Based on analysts’ forecast, CNBC reported that the S&P 500 will likely rise 5.4% based on the average. The median forecast suggests a 7.1% upside for next year from these levels. Credit Suisse is the most bullish brokerage. Analyst Jonathan Golub sees the S&P 500 at 3,425 next year—an upside of 10.4%. Morgan Stanley and UBS are the most bearish brokerages. They have a 2020 S&P 500 target of 3,000—a downside of 3.3% compared to the current levels.

What helped the Dow Jones and S&P 500 this year

This year, the US economy has been better than expected. The GDP growth forecasts shattered expectations in all three quarters. Also, the Fed boosted the sentiments by lowering rates by 75 basis points through three successive rate cuts. Corporate earnings have been in line with market expectations. Over the last two months, there has been optimism that the US and China could reach some sort of agreement in the trade dispute. All of these factors helped the S&P 500 and the Dow Jones scale record highs this year. The fact that the consensus view was too bearish about 2019 and we entered the year with a crash in the fourth quarter of 2018 also helped lift markets in 2019. Incidentally, even as the S&P 500 and the Dow Jones crashed in the fourth quarter of 2018, President Trump advocated buying stocks. Read Dow Jones and S&P 500 Surge: Trump Was Right! to learn more.

Article continues below advertisement

Watch out for earnings and the trade war

Notably, the S&P 500’s earnings have fallen this year. However, for the next year, corporate earnings will likely bounce back. According to a FactSet report, analysts expect S&P 500 companies to report a 9.7% year-over-year rise in their earnings. The forward PE ratio is 17.5. The forward PE ratio is higher than the five-year and ten-year averages. Looking at the PEG ratio, the S&P 500’s PEG ratio is more than one, which could indicate that the valuations aren’t exactly mouthwatering.

Risks are rising

This year, US GDP growth has surprised on the upside. However, the trend has been downward sloping with the GDP growth falling on a sequential basis in every quarter. A slowing US economy might put pressure on the S&P 500 and the Dow Jones Index next year. The Fed has indicated that it might hold on to more rate cuts for now. We also have the US presidential election next year, which might lead to more uncertainty for markets. While President Trump’s trade war has spooked markets, some of the Democratic candidates propose certain policies that are making markets even more uncomfortable.

The S&P 500 and Dow Jones might not enjoy the kind of rally next year that we’re witnessing this year. Currently, there are more downside risks than upside risks for markets going into 2020.

Advertisement

More From Market Realist