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February 25, 2020
Behind the scenes at Goldman Sachs, thought-provoking insights are bubbling up each day. This space is for a few nuggets we think are worth sharing. From macroeconomics to the genome medicine revolution to the rise of digital gaming, these stories from around 200 West show you how top-level views can impact your life (and maybe even shape the way you think about money).
The bull market will continue for an 11th consecutive year. The S&P 500 will end 2020 at 3,400, with an average profit margin around 11%. And corporate earnings will grow about 5%.
Those are just some of the 2020 US stock market forecasts that David Kostin, Goldman Sachs Research’s chief US equity strategist, shared in a recent episode of the Exchanges at Goldman Sachs podcast.
Kostin and host Jake Siewert, the firm’s Global Head of Corporate Communications, covered a range of topics including monetary and fiscal policies, US-China trade dynamics, the election year and overall economic growth.
We think it’s worth listening to the full episode, but here are a few highlights.
Toward the end of the podcast, Siewert asked Kostin to give his one-minute report of the 2019 equity market. We think it’s a helpful summary of last year’s record performance and how the drivers will differ in 2020.
“I think the most important [thing] to understand why we’ve had almost a 30% return in US stocks in 2019 is the fact that the stock market fell by 20%, almost 20% in the fourth quarter of 2018,” Kostin said. “So we actually had a particularly low starting point from a timing perspective that was important. And 90% of the return to the stock market this year, 2019, came from valuation expansion, as opposed to earnings growth. Really there was not very much earnings growth for 2019. And so we look at the next year, the story is more earnings driven as opposed to valuation driven. So the earnings are the key driver for next year.”
The low starting point for markets in 2019 wasn’t the only driver of valuation expansion. Kostin said the Federal Reserve’s dovish pivot also featured prominently in the story.
“The Federal Reserve at this time last year was anticipated to be hiking interest rates about four times in 2019,” he said. “And as a result of that pivot, in fact the Federal Reserve ended up cutting interest rates three different times, and that has supported the expansion in valuation, the relationship between interest rates and stocks.”
Speaking of the Federal Reserve, Goldman Sachs Research economists assume the Fed will be on hold – meaning no cuts or hikes – through the middle of 2021. And that should keep equities attractively valued relative to interest rates.
“[A stable policy rate] is also consistent with pretty low long-term treasury yields, which are going to rise in our forecast slightly to around [2.25%] at the end of 2020,” Kostin said. “And that environment is still positive for equity prices.”
Consumers should continue to be a bright spot for both the economy and markets in 2020.
“The broad assumption we’re making is that the US consumer ... which is about 70% of the US economy ... is in a very strong position,” Kostin said.
Kostin pointed to factors like the lowest unemployment rate in decades, wage growth at around 3.5% and inflation below 2% – not to mention high consumer confidence. What’s more, trade and political uncertainty have driven CEO confidence to one of its lowest points in a decade.
“And so all those assumptions give a view that the consumer is likely to continue to expand and grow, and that’s a key driver of the economy and corporate earnings,” Kostin said.
Trade uncertainty and the outcome of the US election are some of the biggest question marks for equities in 2020 – but so too are share repurchases, in Kostin’s view, after a surprising drop in 2019.
Corporations have been a key source of equity demand ever since the tax cuts of 2018, which decreased for corporations from 35% to 21% and left them flush with cash.
“They took these extra profits and a big chunk of that was used to buy back stock,” Kostin said. “Of course, some of it was also used to invest for growth and do other things. But that jump in buy backs, I expected that after 2018 would increase modestly in 2019. In fact, it increased at the first quarter, and then it surprised me. It dropped by 18% in the second quarter. And so that reversal of the amount of marginal dollars directed toward buy backs is a surprise.”
His team expects a 5% decline year over year in cash spent on share repurchases, which would translate to a little under $700 billion in buybacks in 2020.
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