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Wall Street's equity strategists see stocks posting far more modest gains next year compared to 2019 as U.S. economic growth slows, the pace of stock buybacks cools and volatility rises as voters prepare to head to the polls in the 2020 presidential election.
Some strategists, including Morgan Stanley's Michael Wilson and UBS's Francois Trahan, expect stocks to decline on expectations of weak profits and lackluster fundamentals.
Credit Suisse's Jonathan Golub, more bullish than his peers, told clients he sees "abundant" stock buybacks, smaller earnings headwinds and multiple expansion that should send stocks up 10% by December 2020.
The median strategist target for 2020 sees the benchmark S&P 500 index climbing to 3,325 by the end of next year, implying a 7% climb from current levels. The average target of 3,272, meanwhile, represents about a 5% gain.
While far closer to the stock market's average annual gain over the last several decades, the median forecast for 2020 represents a marked deceleration from its 2019 rally.
Investors in the largest public U.S. companies have seen a remarkable year in terms of returns. The S&P 500, up 24% since January, is on track to clinch its best year since 2013. Including dividends and other payments, an investment in the S&P 500 would have returned 26% in 2019 thus far.
The gains have been in large part thanks to persistent growth in technology and resiliency in the new communication service sectors despite the ongoing trade fight between the U.S. and China.
Chipmakers, in particular, have proven reliable despite the economic barbs. The VanEck Vectors Semiconductor ETF, which tracks the performance of U.S. chipmakers like Intel and Nvidia, is up more than 50% since January. Meanwhile, the best-performing stock in the S&P 500 is Advanced Micro Devices, which has seen its equity price rise 114%.
But despite the big gains in beloved tech and internet stocks, Wall Street's strategists now also favor a choosier stock-picking strategy. One that prioritizes lower levels of debt, reliable income and solid finances.
Nearly all touted the importance of finding under-loved stocks with solid fundamentals and more compelling price tags opposed to the high-premium, high-growth equities that fueled the S&P 500 for much of the past five years.
"We believe the US economy will muddle through in 2020, but expect EPS growth to disappoint," Wilson wrote on Nov. 18. "We prefer value over growth, with a slight defensive bias, given our tepid forecasts and last week's fade in 10-year Treasury yields and the ratio of cyclical to defensive stocks."
CNBC also analyzed which sectors strategists expect to post the best gains in 2020, with many looking to classic value plays like financials and industrials.
Credit Suisse's Jonathan Golub was the biggest bull of the strategist of the group thus far, predicting 10% upside to the S&P 500 from current levels and finishing next year at 3,425.
While the strategist acknowledged that economic data has decelerated over the past year, he instead focused on what he expects to be weaker profit headwinds, plentiful buybacks and multiple expansion.
"These estimates imply EPS growth of 5.2% next year, a substantial improvement from 2019′s 1.0% expected increase," Golub wrote in a note to clients on Nov. 18. "Economic data has decelerated over the past 1+ years, resulting in the outperformance of Low Vol and Growth stocks, at the expense of Value."
"This leadership shifted more recently, on aggressive Fed action (3 cuts) and improving economics. Our work indicates that this rotation will continue through the early part of 2020," he added.
Golub's expectations for improving S&P earnings per share imply a rebound to recent trends. The year-over-year earnings decline for the third quarter of 2019 has thus far been 2% thanks to tough comps, contractions in the manufacturing sector and persistent trade angst.
If the blended third-quarter profit results for the S&P 500 are still negative by the time all components report, it will mark the first time the index has reported three straight quarters of year-over-year earnings declines since the fourth quarter of 2015 through the second quarter of 2016, according to FactSet analyst John Butters.
On the flip side, Morgan Stanley's Mike Wilson and UBS's Francois Trahan are Wall Street's biggest bears.
Unlike their peers who see sluggish growth, Trahan and Wilson see a decline for the S&P 500 in 2020 with the same year-end target of 3,000.
Trahan, who became UBS's head of U.S. equity strategist this year, said his forecast is based on expectations for downside in the first half of the year and a modest recovery thereafter.
"It's clear to us that equities will likely start pricing in an economic recovery at some point in the coming year. That said, that rally is unlikely to begin until the economic slowdown has been fully priced in, and our work suggests that this will likely take another six months or so to play out," Trahan wrote in a note to clients on Nov. 13.
"As the backdrop continues to weaken—and most signs point to this being the case—the slowdown eventually brings earnings growth for even the large cap index down into negative territory," he added.
Wilson echoed Trahan five days later and told clients that Morgan Stanley expects "disappointing" earnings per share in 2020 and prefers value stocks with a defensive tilt.
"We'd argue that in 2018, an aggressive Fed quashed one of this decade's best years of growth, while this year, the Fed elevated asset prices despite broadly slowing growth-something we identified well in 2018 but missed this year," he wrote.
"However, we expect that by April, the liquidity tailwind will fade and the market will focus more on fundamentals," he continued. "Ironically, the outlook for the fundamentals is less certain for 2020 than for 2018/19 given more developed trade tensions, an election, and a weaker US economy."
Wilson added that a recovery in PMI and economic data will likely be more elusive than what consensus estimates currently assume and wrote that he thinks earnings growth will be "stagnant" if not down in 2020.