Outlook for Stocks in 2020
Source: FactSet; Archer Bay Capital LLC
Where we have been
When 2019 started, the markets had just swooned with the fear of recession. Expectations were low and companies were pessimistic. What a difference a year makes. As each month passed and the concern for a recession faded, stocks continued a bumpy ride up.
The chart above shows the last two years of the S&P 500 in order to give a perspective of the swing from fear to optimism.
Where we are now
Companies are now starting to report their results for the December quarter and full year of 2019. In a year when the stocks of the S&P 500 rose 31%, earnings for the full year of those same companies are coming in with only a slight increase. Why the disconnect?
It’s all about expectations.
As the year progressed, Wall Street analysts continued forecasting earnings losses which didn’t happen. It wasn’t a highly profitable year, but at least there were profits. And revenues grew faster than earnings, which helped companies weather the trade war uncertainty and higher wages.
It’s clear in the chart below that revenue growth has remained fairly stable compared to the volatility in earnings.
Source: I/B/E/S data from Refinitiv; Archer Bay Capital LLC; actual pre-December 2019, estimate post-December 2019
Where are we going
Not all economic sectors are growing at the same rate. There is wide variation. The table below shows the breakdown of the S&P 500 by the eleven economic sectors and their corresponding earnings growth forecasts.
Source: I/B/E/S data from Refinitiv; Archer Bay Capital LLC
Energy companies are showing the biggest swing but it is a relatively small part of the S&P 500. Technology and Industrial companies will have the biggest impact overall due their size in the index.
Is it worth staying in the market now?
There are always lots of reasons to worry about the economy and the markets. Sitting on cash can feel safe, but the hidden risk is losing spending power to inflation. A mix of stocks, bonds and cash helps balance returns with inflation and market risk. The right mix should be based on your personal situation.
Volatility will continue in the stock market and a price pullback will happen sometime but it is impossible to predict. What we do know is that companies are paying steady dividends; the yield of the S&P 500 is 2.0%. As comparison, the yield on the 10-year US Treasury bond is 1.8% and money market funds are paying around 1%.
We are staying the course with our allocation to stocks. For long term savings, we believe it is the best option…and we continue to watch the trend in company earnings.
At Archer Bay Capital, we help clients with their long term financial goals. Contact us to discuss stocks, earnings and our forecast in greater detail, or to schedule a consultation today.
