This post was written exclusively for Investing.com
They had risen a healthy 2019 from the abyss to close the year by almost 29% higher. The considerable progress to a certain extent seemed to have been made from the beginning of the year.
The steep sell-out of the market in 2018 due to fears of a US recession in 2019, battered shares and profit multiples. It made the setup for stocks en route to 2019 simple in some respects. A recession would cause the profit to collapse and the profit to multiply, which justifies the sale. In the meantime, no recession meant that stocks were too cheap and hard to ignore.
The prospects for 2020, however, do not seem to be clearly defined.
Instead of entering the oversold new year and trading far below historical norms, equities are trading near their historical averages until the beginning of 2020. This means that, considering the years 2019, not much is left up for the stock market in this new year. big end of the year push.
And the recent collection of shares can derail just as easily if earnings estimates fall or investors choose not to give shares higher earnings multiples.
S&P 500 daily price chart
Reasonably appreciated
The S&P 500 is currently traded for approximately 18.5 times 2020 earnings estimates of $ 175.52 per share based on data from S&P Dow Jones. Returning to the year 1988, the S&P 500 trades on average for around 18.9 times expected earnings estimates. With that valuation, the index would be traded for around 3,315, only 2% higher than the 3,257 level on January 2.
Taking more risk is needed
It means that equities can see meaningful progress in 2020, it can cause investors to look for returns in a world with low interest rates to pay higher prices. In the absence of rising earnings estimates, an important driver for stock prices in 2020 will have to come from investors' interest in rising risks. This means that the S&P 500 will have to see its forward P / E ratio rise above that 30+ annual average of 18.9.
Forward P / E Ratio
(data from S&P Dow Jones)
Profit estimates
Another major problem for the S&P 500 in 2020 will be the profit estimates themselves. For example, earnings estimates have fallen dramatically in the course of 2019. If the same thing happened again in 2020, this would put further pressure on equities to rise purely to multiple expansion and that could result in equities being heavily overvalued.
For example, in 2019, earnings estimates fell by nearly 8% to $ 158.14 from $ 171.74 on December 31, 2018. But they were as high as $ 176.49 on September 28, 2018, a decrease of almost 10.5%. Meanwhile, the estimates for 2020 have fallen almost 6% from a high of $ 186.36 to the current $ 175.52 per share.
S&P profit estimates
(data from S&P Dow Jones)
Low rates
The path that lies ahead is less certain than a year ago. Despite the signs of an improving economy, we cannot know for sure whether this will translate into higher earnings estimates for 2020.
In addition, if the economy improves, it can lead to higher returns in the long term. term – end of the curve, making shares less attractive, and keeping a good view of the risk that some investors are willing to take and the price they are willing to pay.
The year-end rise in shares has brought prices to a level that already seems reasonably valued, and it will take some hard work before they continue to rise this year. It can lead to the bull story being easily thrown away while stock prices fall in 2020, not higher.
At least this seems like a story to keep a close eye on.
