Stock Market 2020 [Data Reveals Where the Market is Going] (2024)

The stock market is on FIRE lately but where’s it going for the rest of 2020?

In this video, I’m sharing my favorite investing tool to show you how to invest for the rest of the year. We’ll dig into some professional-level stock market data for the risks and returns in 2020.

My Favorite Resource for Stock Market Analysis

Nation, nothing seems like it can keep thestock market from heading higher but in my experience as an equity analyst,that’s when the risk to your investments is the highest.

And it’s times like this that it helps to look into the data to give you an idea of those risks and a direction. So I wanted to use today’s video to share one of my favorite resources, I’ve used this tool since my days as an analyst, it always helps focus my strategy and it’ll help you put together a better stock market forecast.

FactSet puts out this Earnings Insight download, usually every couple of weeks and more frequently when stock market earnings are being reported. It’s a great look into the stocks in the S&P 500, how sales and earnings are coming out and can tip you off to problems in the market.

And the most recent report is really easy tofind, you just go to Google and type in, Factset Earnings Insight. The mostrecent report is almost always going to be the first result, it’ll be a pdfthat you can download a copy or just view online.

Decoding the Stock Market in 2020

I want to scroll through the most recent andshow you what stuck out to me and use that to give us some ideas for the stockmarket in 2020.

Companies are now reporting their earnings for the fourth quarter so we’re getting a crucial look into that holiday period for companies and how it drove profits. Remember that stocks are an ownership in a company’s earnings so this is ultimately what you own when you invest in a stock and you want to see this number growing.

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And this highlight for the earnings growthrate immediately hit me like a sack of doorknobs. This says that earnings are1.9% lower over the last year and companies have been reporting this kind ofearnings growth for a full year!

So even though the market is booming higher,profits at these companies are shrinking. Now we’re not in a recession yet andthe market can go still go up with a little profit weakness but this is a hugewarning sign.

If we scroll down a little, Factset always hasa topic of the week in which the go into a little more detail and this week isa great look into how expensive stocks are right now.

So Factset shows you the Forward Price-to-Earnings ratio here. Most investors are used to seeing the price-to-earnings ratio, that’s a stock’s price divided by the earnings, so a measure of how much investors are paying for each dollar in a company’s earnings. But you’re usually seeing this on a trailing basis, so the earnings a company has made over the last year.

This Forward P/E ratio is instead taking whatanalysts expect the companies to earn over the next four quarters so it’s alittle different measurement. It still shows you how expensive a stock or thestock market is but its ASSUMING that analyst expectations for market earningsare going to be pretty close.

And here we see that the stock market is atit* most expensive going back to 2002, we have to go back to the tech bubblefor a time stocks were more expensive.

The stock market as a whole, again measured bythat S&P 500, is trading for 18.7-times those expected earnings. Factsetalso tracks the longer-term averages so we see here that the 10-year averageP/E is 14.9-times and the 20-year average is 15.5-times.

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So comparing the current price of stocks, that18.7-times PE ratio, we find the market about 25% more expensive than thelonger-term averages.

Put another way, stocks would have to fall bymore than 20% for them to be considered around their fair value and I’d arguemaybe even down 30% or more to be considered a good value!

You see in this chart the graph of thatforward price-to-earnings ratio for the stock market, so the highest it’s beensince 2002, and I’ve highlighted a point above. Something we’ll talk aboutlater, despite the fact that companies are reporting declining earnings,analysts have really high expectations for 2020 earnings. Now I’m not going tosay my analyst brothers and sisters are full of sh*t but I do think there aresome problems here with forecasting higher profits.

This chart shows that PE ratio by stock sector and you’ve got some really interesting info here. We just finished up our 13-video series on the best stocks in each sector and I love taking the data to show us where the best opportunities are in each group.

So here we have the dark-blue line is thecurrent PE for each sector against the lighter-blue which is the 20-yearaverage. And you see some sectors are wildly expensive like Utilities andMaterials. If you take the current PE of the utilities companies, 20.5-timesearnings, against that longer-term average of 14.4-times…that’s 42% moreexpensive now than the sector usually is!

On the other hand, you look at the right sideof the graph and some of these sectors like Energy, Healthcare and Financialsare all much closer to their long-term PE averages.

So using just this chart, you get an idea ofhow expensive each sector is and maybe, just maybe the relatively safer stocksif the market gets into trouble.

You’ve got the sectors that are relativelycheap; so that Energy, Healthcare and Financials that won’t have as far to dropin a crash. Then you’ve got something really interesting here with consumerstaples, which is 21% more expensive than its average, and that UtilitiesSector.

These two are usually what you would think ofas safety stock sectors, right? You would expect utility stocks to do well in arecession or market crash because revenues and profits are going to be fairlystable…but, BUT, if these stocks are already trading at 42% more expensive thanthey normally are, they’ve got a long way to fall before they get to anysemblance of fair value.

Now if we do get a recession then interestrates will fall and some of these utility stocks and staples might still do okbut there’s definitely the risk that these two sectors most investors arecounting on as ‘safety’ in a crash, that they won’t quite be the safety youexpect.

Scrolling down and we see more detail into themarket earnings for the quarter. This says that if companies in the S&P 500report an earnings decrease for the quarter, and it’s pretty much guaranteedthey will, it will be the first time the market has had four consecutivequarters of profit losses since the 2015/2016 period. Now if you remember,stocks were basically flat for the entire year and a half from beginning 2015through mid-2016, so when earnings aren’t great, stocks don’t usually do aswell as they have been lately.

Something else that really stuck out to me wasthis revenue growth. So sales for companies in the S&P 500 aren’t doing toobadly with 2.9% growth expected for that 4^th quarter. Now what’ssurprising about this is that companies are making more revenue but not able totranslate that into bottom-line profits.

That’s a big red flag for me. It means eithercosts are going up, so operating costs are increasing and hittingprofitability, or taxes or interest costs are going up. Well we know taxes andinterest costs aren’t increasing so we want to take a close look at operatingcosts, especially general wages and materials costs to see what the problem ishere.

You’ll find a lot of detail on earnings withineach sector throughout the report but I want to scroll down to the marketforecast section. Here we see the stock market earnings analysts are expectingfor each quarter this year and all of 2020.

So here despite the fact that earnings forcompanies in the stock market only increased by 0.2% in all of 2019, analystshave some pretty rosy expectations for 2020.

For the first quarter, analysts expectcompanies to report earnings and revenue growth of 4.3% and this is all on ayear-over-year basis so the first quarter 2020 versus the same quarter 2019.

If you look at the other quarters though,analysts expect revenue to increase a little up to growth of 5.9% in the fourthquarter. But they expect bottom-line earnings to just explode higher, as highas ten- and fourteen-percent in the third and fourth quarter.

In fact, for all of 2020, stock marketanalysts expect earnings to be 9.5% higher while revenue grows by about halfthat at 5.2% year-over-year.

This is where I have a problem. First is youhave to believe that profitability will turn around and start increasing. Ifyou’ve only got revenue growth of 5%, so top-line sales, but think thosebottom-line earnings are going to be 10% higher then that means companies willbe able to cut costs or use greater financial leverage or really boost theirshare buybacks.

Now interest rates are low but most companiesare already borrowing as much as they want so I don’t think they get there withmore leverage. Share buybacks dropped 15% last year and are expected to dropanother 5% in 2020 so it doesn’t look like that’s going to boost the bottomline earnings per share either.

So how do analysts think companies are goingto cut costs so much as to increase earnings by twice their sales growth?Historically low unemployment means wage pressure is going up, not down. I justdon’t see this big increase in profitability and that’s a big potential fordisappointment in the market.

So I want to jump ahead a little and look atthis chart. This is the market earnings actual and expected. We see thatcompanies are expected to report about $162 per share for 2019, pretty muchflat from 2018, but then we see that big jump, 9.4% higher to $177 per share in2020.

And on this, the S&P 500 is trading atabout 3350 or that 18.9-times forward earnings. But…what if those earnings areonly 5% higher, so the market reports earnings of $170 per share. Then we seethe market is actually trading at almost 20-times earnings…that’s expensive!

Factset also surveys analysts for their stockmarket price target and we see here expectations for about 3528 on the S&P500 by the end of 2020. Now if we look at where the market is, at 3337 already,that only leaves about 5.7% for a gain on the year.

Now analysts can be wrong, hell, they oftenare, but basically what this is saying is that for all this risk. For asexpensive as stocks are already, even if those high earnings expectations comeout rainbows and unicorns, those analysts only see about a 6% upside for theyear.

Another theme I want to point out, and this issomething we’ve seen develop for much of 2019 is the difference betweencompanies that get most of their sales from inside the United States versusthose with a more international business.

The green bar here is companies with less thanhalf their sales in the U.S. whereas the light-blue then is companies with MOREthan half their sales domestically, here in the states. So this first chart isearnings growth for the fourth quarter and companies with a more internationalbusiness are expected to see a 4.4% decline in profits. Those with most oftheir business inside the U.S. though, only expected to see a half percentdecline in profits.

Same picture here with revenue growth.Companies with most of their business outside the U.S. are expected to booklower sales, down 0.4% compared to last year. Companies with most of theirbusiness in the U.S., expected to book 4% sales growth in the quarter.

So what we’ve been seeing is, because ofsluggish growth internationally but that stronger economy here in the UnitedStates, companies with a domestically-focused business have done better.

A chart here that ties in really well withwhat we were talking about earlier, how falling profitability has meant evendecent sales growth has still meant declining earnings. This chart shows thenet profit margin for the market, so that bottom-line profitability with thedark-blue line being end of year 2019 and the grey being end of year 2018.

And we see that most of these sectors areseeing falling profitability. Profitability in the real estate sector was 34.2%in 2018 but fell to 33.4% last year. Tech stocks booked profitability of 22.7%in 2018 but that fell to 21.7% in 2019.

In fact, only three of the 12 sectors sawtheir profitability increase last year. That’s Financials, Utilities andMaterials.

So there are a lot of negatives here or maybeI’d say risks but just an expensive stock market usually isn’t enough to sendeverything into a crash. You might get a five- to ten-percent selloff but itisn’t really a crash-catalyst like say the Fed raising rates would be.

BUT there is a crash catalyst that I don’tthink the market is paying enough attention to and it’s the recent Coronavirus.Granted it’s not a global epidemic but this thing hit China at the worstpossible time, just before the Lunar New Year when everyone was thinking abouttraveling and spending money…it pretty much shut China down for business.

The virus is going to knock off at least a fewpercent off first and probably second quarter economic growth for the world’ssecond-largest economy. And while these kinds of scares usually mean abounce-back in later quarters, it could be the tipping point that sends theglobal economy into a recession.

We were already seeing a record in loandefaults around China. The shadow banking market is on edge there and some ofyou remember the huge drop in Six Flags last quarter when they announced theChinese manager had defaulted on its loan.

So what I’m worried about is that these veryrough two quarters for the Chinese economy become the catalyst for a financialcrisis in the country and just a domino effect all over the world.

Now I wanted this to be mostly a resourcevideo, show you the information and let you decide your own stock marketforecast for 2020 and how you wanted to play it. But I can share how I’mplaying these risks and trying to make money as well as protect myself thisyear.

First is I’m holding a lot of cash, bonds andreal estate. Normally I would have maybe 5% of my money in cash, 15% in bondsand twenty- or twenty-five percent in real estate.

Right now though, I’ve got 25% of myinvestable assets in cash, 20% in bonds and that 20% in real estate, so abouttwo-thirds of my assets outside the stock market. And we’re seeing this in alot of hedge funds and private equity funds right now. Warren Buffett’sBerkshire is sitting on $128 billion in uninvested cash. TIAA-CREF, one of thelargest pension funds in the U.S. is sitting on about 30% cash right now.

Second is I’ve also sold covered call options on a lot of my stock positions. Those of you in the nation will remember our option investing video a couple months ago where I put $25,000 in share of Uber and Pinterest. But to hedge the risk in those, I also sold call options at a higher price so I collected some cash on the investment.

Third here, I’m also positioning in some of those relatively less expensive sectors like energy, healthcare and financials. Now that’s not to say these three sectors won’t get hit in a stock market crash but since they’re already fairly cheap, they don’t have as far to fall so might not do as bad as the rest of the market.

The stock market is sending a lot of warning signs for 2020 and investors need to be careful. This isn't about timing the market but about knowing where everything is pointing and how to be ready!