Credit Suisse’s 2020 outlook calls for earnings per share to improve and for price-to-earnings ratios to expand. The firm is initiating its 2020 S&P 500 price target of 3,425, which represents 9.8% upside from current levels.

The new target is based on S&P 500 earnings per share of $164.50 in 2019 (reduced from $166.50) and $173.00 per share in 2020 (reduced from $176.00). It also implies that there will be earnings per share growth of 5.2% next year, versus just 1% in 2019. Credit Suisse projects that the forward earnings multiple will expand to 18.9 by year-end 2020 from about 18.1 currently.

As far as 2019 in retrospect, Credit Suisse pointed out that economic data has decelerated over the past year or so, and that allowed lower volatility and growth stocks to outperform value. The firm noted that this market leadership has shifted more recently after three Federal Reserve rate cuts and improving economics. Jonathan Golub and his team said: “Our work indicates that this rotation will continue through the early part of 2020. Absent a ‘V’ shaped bounce in the data (similar to 2016-17), we expect this rotation to fade as we move further into next year.”

Given the views on cyclical leadership, Credit Suisse’s strategy team raised its views on more economically sensitive groups: financials, industrials, materials and energy. The firm downgraded more defensive sectors, such as staples, utilities, real estate investment trusts and communications. The firm maintained its Overweight positions in technology and discretionary.

Several assumptions are key to Credit Suisse’s 2020 outlook:

1) revenues to advance in-line with nominal GDP;
2) margin headwinds to be substantially less onerous;
3) buybacks to remain abundant;
4) reversal of decelerating economics to support multiple expansion.

Back in March of 2019, Jonathon Golub and his team at Credit Suisse raised the firm’s 2019 year-end forecast for the S&P 500 to 3,025 from 2,925. The view then was that receding risks, lower inflation and less-hawkish Fed commentary would drive stocks higher. That said, it was at the end of 2018, after seeing the market have its worst fourth-quarter in years, when Golub lowered his 2019 target from 3,350 to 2,925 (versus 2,567 or so at the time).

The S&P 500 hit 3,120 on Friday for the first time.

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