Why One Firm Issued a 3350 Target for the S&P 500 in 2020

Jon C. Ogg

Despite a recent setback in trade talks and in stock market performance, and despite the “sell in May and go away” theme taking hold, 2019 has been an incredibly strong year for the stock market. The S&P 500 was last seen up a whopping 17% after barely four months of trading, roughly double the gains of a normal full year’s stock market expected performance.

Many investors are seeing all sorts of caution and red flags from the financial media every day. With global growth softening, China trade tensions back on the rise and corporate earnings growth muted compared to the past couple of years, investors have many reasons to listen to all the calls insisting that the next recession or major stock market correction is imminent. Still, not everyone is bearish, and some firms remain quite bullish, with an expectation that new highs for the stock market will continue to be seen.

No firm or investor can tell you exactly how the market will perform ahead. Not in a week, in a month or even in a year. Still, many Wall Street forecasters make a living predicting how high the stock market can rise. Canaccord Genuity’s equity strategist Tony Dwyer has introduced a 2020 forecast for the S&P 500 to rise to a level of 3,350.

If Dwyer’s forecast is correct, that is about 15.5% higher than the current level of almost 2,900. Dwyer sees no recession in sight through 2020, and he expects a so-called multiple expansion to continue with a dovish Federal Reserve, available credit and earnings growth.

Dwyer’s fundamental core thesis is that the market should remain positive through 2020. He sees low core inflation and a continued softer Fed tone through year’s end. The recent drop in bond yields and a resteepening of the two- to 10-year U.S. Treasury yield curve should allow the domestic economy to remain on solid footing through the first half of 2020. Even the global Purchasing Managers Indexes and OECD Composite Leading Indexes for 36 countries are showing clear signs of economic stabilization, and historically that has led to better growth.

We have combined Dwyer’s views on why earnings expectations on Wall Street are likely conservative and why there is an expectation for that “multiple expansion” ahead. His note said:

Top and bottom line SPX operating EPS should remain positive for the foreseeable future, with any margin weakness proving temporary until there is a true shutdown in money availability well after an inversion of the yield curve. Our 2020 SPX EPS estimate assumes a conservative nominal growth rate of 5% in SPX operating EPS from our current 2019 estimate of $168/share… Historically, the SPX operating earnings P/E has been driven by inflation, and when core inflation is between 1-3% the SPX has traded at an average 19x. This has been true in the current cycle where the SPX traded at over 19x from 3Q/2016-3Q/2018.

Dwyer also sees any stock market selling pressure as being short lived. He said:

Our core fundamental thesis suggests that until there is a renewed perception of tighter monetary policy or a shutdown in money availability, any equity market weakness should prove limited and temporary. Of course, there can be periods of weakness like the recent 2% drop, but we would remain focused on what has driven the upside recovery from the 12/24 low: (1) the impact of the Fed’s dovish pivot, (2) the positive effect of the significant drop in market-based rates, and (3) the stabilization of the global economic data.

The S&P 500 was last seen trading down about 1.6% (48 points) at close to 2,885 on Tuesday, after having recently put in a new all-time high. There is a 52-week trading range of 2,346.58 to 2,954.13, with that high was just seen on May 1, 2019.