Stock market predictions for 2020.
After another big year for the stock market and the U.S. economy in 2019, investors are looking ahead to 2020 to determine which sectors will lead the next phase of the decade-long bull market. The technology sector has once again been the top-performing sector in 2019, while energy lagged behind the field. In 2020, analysts see more room for upside ahead in select market sectors. Here are Bank of America analyst Savita Subramanian's predictions for the eight top-performing market sectors of 2020.
The Financial Select Sector SPDR (ticker: XLF) exchange-traded fund gained 29.8% in 2019, and Subramanian is anticipating another big year from the sector in 2020. Subramanian says the sector is much less credit-sensitive in 2020 than it was during the financial crisis and has seemingly gotten little recognition in the market for dramatic improvements in quality and cash returns. Despite the sector's relatively high quality and yield, the financial sector trades at the steepest forward earnings multiple discount to the S&P 500 of any sector. Bank of America has an "overweight" rating for the financial sector.
Even after the Industrial Select Sector SPDR ETF (XLI) gained 26.6% in 2019, Subramanian says the industrial sector trades at a recession-level earnings multiple. She says industrials could re-rate to a higher valuation in 2020 if the economy remains strong, trade risks ease, capital expenditures ramp and the Institute of Supply Management's Purchasing Managers Index bottoms. In addition, the climate of elevated geopolitical tensions with China, the Middle East and other regions should support the U.S. defense budget in the near term, a positive backdrop for industrials. Bank of America has an "overweight" rating for the industrial sector.
The Consumer Discretionary Select Sector SPDR ETF (XLY) gained 25.5% in 2019, but Subramanian says investors can expect more upside ahead in 2020. U.S. consumer data has been lackluster in recent months, but Subramanian says the American consumer economy is stronger than it may seem. Bank of America expects consumer spending to increase in 2020, especially if the U.S. and China finalize a substantial trade deal. In addition, refinancing in the housing market driven by lower interest rates should also boost discretionary spending. Bank of America has an "overweight" rating for the consumer discretionary sector.
The Utilities Select Sector SPDR ETF (XLU) gained 21.6% in 2019. Subramanian says utility stocks provide a great source of yield for investors, and the predictability of utility earnings make the sector relatively immune to macroeconomic instability. The sector's current dividend payout ratio is roughly in line with its historical average, suggesting payouts are sustainable but yield upside is limited. Unfortunately, the sector's relative valuation compared to the overall S&P 500 is about 20% higher than its historical average, potentially capping valuation upside. Bank of America has an "overweight" rating for the utilities sector.
The Technology Select Sector SPDR ETF (XLK) gained 45.3% in 2019, beating all other market sectors by more than 15%. In a technology-driven world, Subramanian says the tech sector will once again be a solid performer in 2020. However, after such a strong run in 2019, Subramanian says its prudent for investors to dial back their exposure and keep expectations realistic in 2020. If the recent rotation to value stocks carries over into next year, she says high-flying software stocks could be hit especially hard. Bank of America has a "market-weight" rating for the technology sector.
Three of the top holdings in the Communication Services SPDR ETF (XLC) are "FANG" stocks Alphabet (GOOG, GOOGL), Facebook (FB) and Netflix (NFLX). Subramanian says the FANG group will likely continue to face regulatory scrutiny related to user data in 2020, but likely not as much as in 2019. At the same time, the 2020 U.S. election should provide a shot in the arm for both online and traditional advertising. Subramanian says the sector offers investors both yield and growth, a rare combination in today's market. Bank of America has a "market-weight" rating for the communication services sector.
The health care sector is currently trading at about an 11% forward earnings multiple discount to the overall S&P 500, well below its historical 11% premium. Subramanian says the sector has both a compelling valuation and impressive fundamentals. Unfortunately, health care stocks did not fare well during the last election season in 2015 and 2016 due to policy uncertainty. Subramanian says election-related headline risks will be elevated in 2020, but passage of disruptive policies such as Medicare for All appears to be unlikely. Regardless, Bank of America has a "market-weight" rating for the health care sector.
After another year of underperformance in 2019, the Energy Select Sector SPDR ETF (XLE) is now down 20.1% overall over the past five years. Fortunately, Subramanian says the extended weakness has created deep value in the space heading into 2020. In addition, she says exploration and production companies are focusing more on cash flow and shareholder returns than production growth. Stock selection within the sector is growing increasingly important given younger investors' preference for companies with environmental, social and governance (ESG) awareness. Bank of America has a "market-weight" rating for the energy sector.
Best stock market sectors for 2020:
-- Consumer discretionary
-- Communication services
-- Health care
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