S&P 500 forecast for 2020

Following an extraordinary year of double-digit growth, will the S&P 500 forecast for 2020 predict prosperity or decline for the major index?

Who had an accurate S&P 500 forecast in 2019? An S&P 500 forecast can be valuable heading into a new year… assuming it is right. The index’s barnstorming performance in 2019 surprised many economic analysts – driven by three sudden rate cuts by the Federal Reserve and hope that a rapprochement between the US and China will end an increasingly bitter trade war. It’s set to be the biggest annual gain in six years, and the third strongest since 2000.

0'>S&P 500 analysis powerfully illustrates how good a year it’s been. Between January and November, the index gained more than 25 per cent. Such a stock market boom is difficult to come by, and there have only been six occasions in the past 30 years where the S&P 500 has grown by more than 20 per cent over this 11-month period. In each and every year that followed, the S&P, Dow and Nasdaq remained in green territory, so perhaps it’s no wonder that most projections for S&P 500 performance are rosy.

When it comes to recent 0'>S&P 500 history, Markets Insider figures from December 11 show that 10 of the 11 main stock market sectors have enjoyed double-digit growth of at least 15 per cent. Some, such as IT, have risen by 40.9 per cent. Energy was the only sector to buck the trend, and even then, it grew by a modest 3 per cent.

That isn’t to say there aren’t risks on the horizon. Although an interim deal between Beijing and Washington has been reached, Donald Trump claims many tariffs are going to remain in force – supposedly giving the US an upper hand as it embarks on a second phase of negotiations. On top of all this, the president faces a battle for re-election in 2020. While analysts are primarily concerned about the impact a potential Democratic president would have on the markets, some harbour doubts about Trump too.

Who had an accurate USA 500 forecast in 2019?

To determine who is on the money with their S&P 500 prediction for 2020, it’s a good idea to look at who called it right 12 months ago.

In 2018, only two Wall Street banks were anywhere near being accurate: JPMorgan and Citigroup. Both had forecast that the index would likely end 2019 at about 3100 – and some derided this outlook as far too bullish. At the time of writing, the S&P 500 stood at 3168, far beyond their “outlandish” targets. Both had identified that the levels of panic in the market last winter were overly excessive, and they turned out to be right.

Other banks providing an S&P 500 outlook got things badly, badly wrong. While Morgan Stanley thought the index would end 2019 at 2750, France’s Societe Generale was even more fatalistic – setting a target of just 2400. Investors who listened to that advice would surely be kicking themselves now the S&P is currently a third higher than that.

So, let’s take a look at what the S&P 500 index projections are this year, starting off with those who have had the best track record recently.

JP Morgan US equities strategist Dubravko Lakos-Bujas has set a target of 3400 for the end of 2020 – that’s an increase of 7.3 per cent at the time of writing. He believes that earnings per share also have the potential to increase substantially, adding the caveat that this hinges upon if and when the US and China strike trade deals. On the question of the US election, he thinks it unlikely that a progressive candidate such as Bernie Sanders will end up in the Oval Office, adding: “We think that the two most likely outcomes are Trump’s re-election or an experienced centrist Democrat, which would be neutral or positive for markets (at least initially).”

USA 500
Daily change
Low: 4257.2
High: 4283.8

Goldman Sachs has matched JP Morgan’s prediction, while warning that a united Congress in favour of the Democrats could result in some of Trump’s corporate tax cuts being rolled back – hurting earnings per share as a result. The investment bank’s figures suggest that government decision actually drives bigger S&P 500 returns, adding: “We expect the current bull market in US equities will continue in 2020. The durable profit cycle and continued economic expansion will lift the S&P 500 index by 5 per cent to 3250 in early 2020.”

Others are being even more optimistic. Citigroup (one of the two to get its S&P 500 prediction right last year) believes that the index could hit dizzying heights of 3500 in the first half of 2020 but that it will cool somewhat to 3375 by the year end. That’s still about 75 points higher than what the bank was initially predicting. Explaining its rationale, the bank’s analysts said: “Signs of political polarisation remain, arguing for close polling, and thus we suspect that the Street will become wary by mid-year.”

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Some banks may be overcompensating for excessive levels of caution in their latest forecast. Among them is Credit Suisse, which is predicting 3425 by December 2020. It believes this growth is going to be driven by technology, financial, industrial and consumer discretionary sectors in the stock market.

Who has a negative S&P 500 outlook?

Overall, most S&P 500 index predictions for 2020 are positive – and others include Barclays, Bank of America, Stifel and the Wells Fargo Institute. Only two, Morgan Stanley and UBS Group, are predicting a contraction for next year. Both are predicting a subdued target of 3000 by the winter.

Morgan Stanley analyst Michael Wilson believes that the dip will be driven by stable, but not extraordinary, levels of GDP growth in the US, putting pressure on margins as large corporations contend with big labour market bills. Francois Trahan from the UBS Group has a similar argument and he believes earnings among S&P 500 constituents will enter something of a “recession” for at least two consecutive quarters.

Binky Chadha, a Deutsche Bank analyst who has gained respect for the accuracy of his forecasts, is also striking a cautious note. He believes that the S&P 500 will struggle to maintain current levels of growth given how the index is trading at 19.1 times earnings – a level that hasn’t been reached 90 per cent of the time over the past 85 years.

The US presidential election should make it difficult for the fundamental uncertainty emanating from US trade policy, which has plagued corporates and been a key driver of the US and global growth slowdowns, to dissipate completely. Chadra told Bloomberg

Reading the tea leaves and anticipating what lies ahead in a S&P 500 forecast can be a thankless task, especially when there is so much uncertainty around. With so many investment banks striking a positive tone for the coming year, the question is this: is the majority right?

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FURTHER READING: Nasdaq 100 forecast for 2020

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