Market Commentary | December 9, 2019

2020 Market Outlook: U.S. Stocks and Economy

Key Points

  • The U.S. economy likely will remain bifurcated in early 2020. Manufacturing and business investment may continue to struggle amid trade uncertainty, but services activity and consumer spending may continue to be healthy.

  • The Federal Reserve’s 2019 rate cuts should support stock prices, as well as rate-sensitive areas of the economy. However, rate cuts are only a partial cure for what ails manufacturing and corporate animal spirits.

  • A preliminary U.S.-China trade deal could stabilize the decline in corporate confidence. However, returning to a strong business investment environment likely requires a more comprehensive trade deal.

The dividing line remains firm

U.S. economic growth slowed in 2019, pulled down by weak business investment and manufacturing activity. Although strength in consumer spending and services persists heading into 2020, we expect stabilization—at best—in growth next year. Myriad uncertainties are clouding the outlook, including earnings and the presidential election. Ongoing trade war ambiguity could further depress corporate confidence and investment.

A key risk in 2020 is that manufacturing weakness and business investment fatigue could hurt services activity and consumer spending, by depressing job growth. Although the U.S. unemployment rate (a lagging indicator) remains low, weekly initial jobless claims (a leading indicator) in manufacturing-oriented states have been rising. As such, U.S. payroll growth may weaken if limited headway is made on a comprehensive trade deal. However, global economic stabilization could be positive for U.S. growth.


A lift from earnings?

We expect bouts of market volatility will persist in 2020. Trade news may continue to drive market swings in both directions, absent a comprehensive U.S.-China trade deal. Investor sentiment should also be a factor in market swings, with late-2019’s new highs ushering in elevated investor optimism (a contrarian indicator at extremes). Investor sentiment also may continue to swing more widely than usual, with new highs elevating optimism, only to be dented by negative trade news.

Earnings are expected to accelerate in 2020, but that expectation is partly predicated on a positive outcome to the U.S.-China trade war, which remains uncertain. In addition, due to the effects of tariffs and rising labor costs, profit margins could come under pressure in 2020. The macroeconomic environment, including easier monetary policy and lending conditions, supported price-earnings (P/E) expansion in 2019, but those effects are fading. The wide gap between stock market performance and corporate after-tax profits suggests the latter needs to accelerate.



  • High debt levels and a weaker profitability outlook likely will continue to pressure small-cap stocks. We continue to recommend an overweight to large caps and underweight to small caps within U.S. equities.
  • Factor performance trends are likely to be more consistent than equity sector performance trends in 2020. (Factors include small- vs. large-cap, value vs. momentum, etc.) Quality—such as strong corporate balance sheets, low debt, consistent earnings—and valuations likely will remain important.
  • Availability and cost of credit will be a key to whether economic conditions support stock price gains, given that further Federal Reserve rate cuts appear to be on hold. Corporate earnings may have to do more of the heavy lifting.