STOCK MARKET BUBBLE? STOCK MARKET CRASH 2020? In 2020, we expect US total returns of 6% to 8%, underpinned by modest earnings growth. We believe analyst expectations for 10% earnings per share (EPS) growth are likely to be trimmed. Reduced EPS outlooks are routine and only a source for worry if the economy fails to grow. Since 1996, the S&P 500 Index has advanced in twelve of the thirteen years when EPS forecasts were pared, but no recession took place. The lone exception was 2002 when the technology bubble was still deflating. Recent US dollar strength will likely
be a drag on US earnings growth, while allowing policy easing in other countries, which should boost global economic activity. Canada, meanwhile, is likely to also see modest EPS growth, putting
the market on a forward price/earnings multiple of 14. We remain neutral on Canadian equities.
Although the US yield curve is no longer inverted, its relative flatness points to the possibility of occasional bouts of volatility during 2020. Dividend
growing equities have historically produced higher returns than passive exposure to US equities,
and have done so with less volatility. Many such equities are supported by strong businesses, whose management teams are skilled in allocating capital to value-creating projects, but also have the discipline to return cash to shareholders instead of also pursuing lower-returning projects.
At a sectoral level, healthcare continues to benefit from the dynamics of an aging population. Advances in medicine are occurring due to firms’ investment in research & development, particularly in areas such as oncology and immunology. The risk of the 2020 election leading to radical reforms of the US healthcare system has constrained equity prices, leaving the sector on an attractive valuation relative to its own history.
The interest rate cuts of 2019 should feed into an upturn in new order activity in 2020. Historically, this has benefited consumer discretionary sector, which may also be assisted by the lowest unemployment in fifty years, healthy wage growth, and contained fuel prices.
Financials have performed well in the year following first Fed rate cuts, manufacturing bottoms and when the sector’s dividend yield exceeds ten-
year Treasury yields, as is currently the case.
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