Heading into the new year, CNBC’s Bob Pisani takes a look at the risks that could face the markets in 2020, after reflecting on what things were like a year ago.
In January 2019, the market was pricing in an earnings recession, and stocks were very cheap. Now it’s the opposite. The recession didn’t happen, the earnings recession didn’t happen, and the economy is strong. However, stocks have become more expensive. This issue is now whether things can return to the earnings growth after a flat year in 2019.
Most strategists expect a single-digit earnings growth, which would take some pressure off the high multiple the market has right now. There are early statements from companies reporting at the end of November that are mixed with big names like FedEx, Nike, and General Mills, seeing first-quarter earnings reduced by analysts. Some, like Costco, have seen estimates increased by analysts. Overall, the trend is a little bit lower than expected.
Where Are The Risks
“Looking at risks in 2020,” Pisani adds, “The markets are at new highs because many believe the risks from trade and tariffs are lower. So, there’s a lower risk. The risk from the Fed, many believe, is also lower as they will likely remain neutral. Decent job growth? The risks from the U.S. consumer? Also, a bit lower. But, there are some risks out there.”
As Pisani explains, in terms of moderate risk, a lot of people bring up buybacks. Having been buying back stocks for ten years with a lot of companies, there are still many who think there may be a limit to how far they can go with that.
“The belief that global growth is bottoming and turning around is very high risk, Pisani states. “Many believe it’s unlikely another 2019. It’s going to be this bottom in the global economy that’s been a big driver of the stock market.”
Pisani points out how nothing’s changed in Europe, for example. There’re very few structural reforms there. Another frequent issue seen by strategists in the last week is wage growth concerns. Many believe wages will likely be higher in the years to come, putting some pressure on margins.
The stock market is a game of expectations. Last year was different because everyone had very low expectations. As mentioned, the year started with lower prices, but now it’s the opposite. So the expectations are high, which can be a concern.
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