Here's What Could Take the Bottom Out of Stocks for 2020

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Here’s What Could Take the Bottom Out of Stock Estimates for 2020

Estimates for 2020 stock gains are rolling in and one analyst says a particular factor could take the bottom out of the market.

If the Federal Reserve doesn’t stick to its word that it will cut rates if the economic data deteriorates, the bear case for the S&P 500 could fall to one of flat or a decline.

It’s no surprise that interest rates will be one of the crucial factors in the market in 2020, but zooming in on one

strategist’s call for the S&P 500 can tell us why that is.

For context, most strategists are looking for 5% or 6% gains on the S&P 500 for the next 12 months. Some are looking for gains of 8% or higher.

But LPL Financials’ outlook is for the S&P 500 to rise to between 3,200 and 3,300 by the end of 2020. That’s upside of 5.2% on the high end and just 2% on the low end.

LPL is slightly below consensus, looking for earnings per share on the index of $175, versus the average call for $178.

Built into LPL’s assumptions is an accommodative Fed. To be clear, Chairman Jerome Powell said in October that the Fed will remain on hold about rates for the foreseeable future, but it’s ready to lower the benchmark lending rate should the economy require additional stimulus

And LPL said it expects consumer confidence to remain high, as it has been in 2019, because of the Fed’s position.

The Fed’s “flexibility could continue to support consumer and business confidence, and policy makers will be ready to adjust if conditions turn,” the firm said in a note.

Part of LPL’s call for GDP growth in 2020 of 1.75% is a strong consumer, “as we expect the labor market to remain strong in 2020 with a low unemployment rate,” the firm said.

“Low interest rates and tax cuts could also continue to pad consumers’ wallets.”

The consumer represents at least 70% of U.S. output. If the Fed is unable to continue stimulating the economy, consumer spending, which grew at just above 2% in 2019, could falter. In this case, the economy could head into recession before economists currently predict. 

Some say that further rate cuts can't stimulate economic growth any further; they can provide only a lower discount rate for stock valuations.

LPL's call that the S&P 500 could appreciate 2% makes it seem entirely possible that a less effective Fed could potentially leave the U.S. market flat or down for 2020.