Banking & Finance

Why Some of the Major Financials Look Overvalued for 2020

The year 2019 was nothing short of spectacular, and the bull market is now well over 10 years old and the economic recovery is the longest-running of our lives. The stock market indexes all put in strong gains at the end of the year, and the Dow Jones industrials ended up at 28,538.44 for an annual gain of 22.3%. The S&P 500 closed rose by an even more impressive 28.9% in 2019 but was bested by the tech-heavy Nasdaq with a whopping 35.2% gain. While saying the market was up huge is an understatement, many investors have to be wondering if the stock market rally in November and December, as well as weighing the ongoing concerns about the economy and around the planet, mean that some of the massive bullish expectations may need to be tempered.

After looking at all the data and forecasts available, investors should probably expect total stock market upside of just 7% to 8% in 2020. That’s good news in that it’s an expected gain, but one-third of those gains are expected to be from dividends. 24/7 Wall St. is about to release its 2020 Dow target, but if the market is going to rise, most investors would expect the financial sector to perform well also. After all, the financial giants reap the rewards of strong markets and strong economies.

What if it’s not all rosy for the market in 2020? 24/7 Wall St. has evaluated many Dow and key S&P 500 stocks with outlooks into 2020, and the expectations are rather weak for financial services stocks. It looks like the outcome may be binary: either Wall Street has not been optimistic enough about its own prospects or the big gains of 2019 robbed the gains that could have been expected in 2020.

As for a backdrop on the banks and major financials, there actually seem to be more positives than negatives, based on the known issues today. Interest rates are projected to remain stable in 2020, with little or no real changes expected in federal funds. Long-term interest rates are expected to remain stable as well. Unemployment is exceeding low at 3.5%, inflation is not pressuring the markets in that 2% objective, and consumer balance sheets and personal finances appear to be holding up quite well. Business spending is even expected to tick up as the global growth fears have subsided and as trade war tensions have cooled.

Whether the 2020 election will change how financial companies govern themselves is still unknown, and it is basically 11 months out.

Here is an outlook for the major money-center banks and financials that lead the sector each day. Consensus analyst target price data are from Refinitiv, and we have shown past performance and expected performance in 2020. It is probably too soon for foregone conclusions about the entire financial sector for the entire year, but the positive backdrop that should offer support to its own industry is currently just not very loved by Wall Street itself.

American Express Co. (NYSE: AXP) closed out 2019 at $124.49 a share, a 30.6% gain, and it was down a tad from the highs in a 52-week range of $93.23 to $129.34. Amex’s consensus target price of $131.83 only implies an upside of 5.9%, and the 1.4% yield would imply a 7.3% total return in 2020. With a drop of 4% in 2019, and with any pullback, there is a serious possibility Wall Street might juice up expectations if earnings are good in the coming weeks, after having seen radio silence for months.

Goldman Sachs Group Inc. (NYSE: GS), which has been moving more into mainstream financial services rather than just the wealthy and institutional clients, recovered from its woes and posted a 37.6% gain in 2019, after closing the year at $229.93. Its 52-week range of $163.35 to $232.21 should explain some of the challenges it faced from regulators and the overseas scandals. The consensus target price of $244.73 implies a gain of just 6.4%, and the 2.2% dividend would offer an implied total return opportunity of 8.6% for 2020. The question to ask, assuming Goldman Sachs is moving beyond its scandals, is whether it can entice analysts to go back up to some of the old $300 target prices from 2018 and 2017.