With the record-breaking bull market rolling in its 11th year, there are a lot of reasons for investors to expect the wins to continue, but 2020 could mark a different story, according to one of Bank of America Merrill Lynch’s top strategists.
After the S&P 500 rose about 30% in 2019, Bank of America Merrill Lynch head of U.S. equities and quantitative research Savita Subramanian stood by her call for the S&P to close 2020 pretty much in-line with where it started the year.
“I’m not bearish, I just think that the market has gotten a little ahead of itself and this year is going to be more about earnings rather than multiple expansion” she told Yahoo Finance at the World Economic Forum in Davos.
“Last year, 2019, was really a year where the market kind of ran on fumes, it was all multiple expansion, no real fundamental earnings growth. So, I think this year is sort of the ‘show me’ year where we really need to see earnings materialize in a meaningful way in order to justify the multiples we’ve gotten to for the S&P,” she said.
One of the ways Subramanian sees earnings growth hitting 8% this year is improved pricing power for companies heading into 2020, as evidenced by a reversal in margin compression. Comparing the overall growth of the consumer price index (CPI) to average hourly wages, Subramanian highlights that the average gain in prices are outpacing wage growth.
“If that continues or at least holds steady I think that we could see a better year from a margin perspective,” she said.
‘A really strange bull market’
One major difference Subramanian sees forming this year versus last year, however, is a hands-off approach to monetary policy at the Federal Reserve. After cutting rates three times in 2019, the Fed won’t likely need to step in with more accommodative measures in 2020, Subramanian said, due to “some really strong green shoots within the economy.”
“We all, within research, have our list of indicators that we look at ... everybody is seeing their indicators that they pay attention to inflect positively,” she said. “This is the first time in this bull market that we’ve seen this concert, this array, of indicators inflecting positively.”
That optimism in the short term might seem at odds with a yearend S&P 500 price target that is essentially flat, but Subramanian did highlight some areas of concern — including liquidity risk among the largest growth engine of the current bull market in mega-cap tech stocks. As she sees it, the big tech names, including Apple, Microsoft, and Facebook, remain the riskiest options out there due to their popularity with a multitude of investors and funds.
“This is a really strange bull market if you think about it, because we’ve had a 10-year bull market that’s been led by tech, and biotech and utilities, like high-yield and high-growth. I mean this is not your normal bull market and those pockets of the market are particularly crowded particularly expensive and poised to de-rate.”