Let’s take a look at J.P.Morgan’s house views explained in US Equity Market Outlook 2020, which was published in December 2019 – before all fears caused by Coronavirus started to influence the markets.
Extract from the report:
“In 2019 the market faced two key headwinds, drag from tighter monetary policy and a substantial increase in US/China tariffs, resulting in a global business and profit cycle slowdown. In the US, we estimate that the cumulative damage from Tariffs alone pushed 2019 EPS growth down to ~1% from potential ~8%. Heading into 2020 these drags are expected to at least partially reverse. Easier monetary and fiscal policies are in motion globally with majority of the benefits expected to flow through the economy in the coming quarters. On the trade front, we remain of the view that at a minimum, a partial US/China deal with some tariff roll-back should be reached ahead of 2020 election though the exact timing remains unclear. Global business sentiment should start to heal and help normalize investment activity including inventory restocking as
fears related to US/China trade, Brexit, and other one-off shocks to large economies fade (e.g. Italy , India, etc.). All of the above leads us to believe that the business cycle should begin to gain stronger traction by early 2020, providing further room for market upside and continued style and sector rotation.
Our 2020 S&P 500 EPS estimate is $180 (+10% y/y) — it assumes partial US/China tariff rollback. Growth upside will primarily depend on the magnitude and timing of trade deal(s), in our view. We have defended our positive equity stance from beginning of this year and in October raised our near-term price target to 3,200 from 3,000. Next year we see the S&P 500 rising further to 3,400 on global cycle recovery, partial trade deal, pro-growth election-year rhetoric and neutral investor positioning. We expect most, if not all, of the market upside to be realized ahead of US elections, which generally have been a positive for equities—S&P 500 rose on average 12% through the prior year with a hit rate of 90%. The global low rate environment is likely to keep the equity multiple elevated given high total shareholder yield and increasing bond ty pe exposure of the S&P 500. While investors increased equity positioning over the past month (in the aftermath of phase 1 trade progress), our assessment is that investors have net exposure which is close to historical averages. Positioning is higher for systematic funds (e.g. volatility sensitive strategies and CTAs in ~75th percentile), but lower for discretionary and fundamental managers (e.g. discretionary hedge funds ~40th percentile). In 2020, we also expect outflows from bonds and inflows into equities funds, which would support equity markets.”
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“Market Volatility and US Election — In our 2019 outlook, we forecasted that median VIX will be around 15-16 this year. Our fundamental fair value model for VIX currently points to a level of ~15, and given the incremental central bank support, our positive view on cycle and trade war developments, we would lower that target by ~0.5 to 1 point relative to last year. In terms of US Presidential Elections, we think that the two most likely outcomes are Trump’s re-election or an experienced centrist Democrat, which would be neutral or positive for markets (at least initially). A progressive left Democratic candidate could be a significant downside risk for the market; however, we assign a low probability to this outcome. While we will continue to re-assess potential election scenarios, at the moment we do not think that US elections are a key risk that should keep investors out of risk markets.
At the Style level, we expect the rotation from Momentum into Value (that began end of Aug) to persist as the global business cycle re-accelerates and puts upward pressure on bond yields and commodities. History implies the current rotation is still less than half-way through (see Style Positioning section below for more details). Within Momentum, we view Low Vol stocks as possessing the worst risk-reward, while Growth stocks should be less vulnerable due to their superior fundamentals in a moderate growth environment and lower sensitivity to yields. As for Size positioning Small/Mid-caps is a GARP play relative to Large-caps and could see re-rating on improving growth and credit outlook, as well as pick up in M&A. In our view, the largest risk to equity portfolios going into 2020 is being implicitly long duration (i.e. positioned for rates falling/staying low).
At the Sector level — Within the Cyclical complex, we favor Multinational Value (i.e. stocks sensitive to USD, Trade Tariffs, Oil, EM) over Domestic Value, and thus our preference for Energy (OW), Materials (upgrading to OW from N) and Industrials (OW) over Financials (N) and Consumer Discretionary (downgrading to N from OW). Our preference for Value within the Growth complex results in us favoring Communications (upgrading to OW fro m N) over Technology (downgrading to N from OW), which has been our highest-conviction overweight since end of last year. Within the Defensive complex, we view Healthcare (upgrading to OW from UW) as having the most attractive value proposition, relative to Staples, Utilities and REITs (UWs) which we see as the most vulnerable sectors. For investment themes, we recommend Cyclicals, US/China Trade Beneficiaries, Energy Recovery, Healthcare Laggards, and 5G Plays, while avoiding Expensive Defensives and Disconnected ESG Plays.”
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