Markets

Barclays says its speedy rally scenario is happening right now

Key Points
  • Barclays Chief U.S. Equity Strategist Maneesh Deshpande writes that stronger industrial data and lower recession odds give him reason for optimism for 2020.
  • He wrote that his "'mini-bubble melt-up scenario' appears to be materializing" due to stronger data and the fact that a recession doesn't appear on the horizon.
  • "We are cautiously optimistic for a detente in the US-China Trade War, and monetary policy also remains accommodative around the globe," he writes.
Traders work on the floor of the New York Stock Exchange
Lucas Jackson | Reuters

A more stable global manufacturing industry and a pause in U.S.-China trade hostilities will usher the S&P 500 to record highs in 2020, Barclays told its clients Tuesday.

The bank's chief U.S. equity strategist wrote that his "'mini-bubble melt-up scenario' appears to be materializing" thanks to stronger industrial data and the fact that a recession doesn't appear on the horizon for now.

"We are cautiously optimistic for a detente in the US-China Trade War, and monetary policy also remains accommodative around the globe," Maneesh Deshpande wrote in a note.

Deshpande set his year-end 2020 S&P 500 forecast at 3,300, matching the median and just topping the average forecast of all Wall Street strategists tracked by CNBC. He explained, however, that an expansion in valuation, rather than earnings growth, will drive most of 2020's upside in line with prior "soft patch episodes accompanied by easy monetary policies."

The December 2020 target of 3,300 implies 5.3% upside from current levels, well below the market's return in 2019. The S&P 500, which clinched a new all-time high on Tuesday, is on pace to finish this year up 25%. But the market's 8.7% rally in less than two months has also left some worried that equities may be overpriced in general, with the S&P 500 hitting records repeatedly throughout November.

Some strategists who've balked at the steep equity prices now recommend a choosier stock-picking strategy — one that prioritizes low debt and consistent income. Nearly all strategists with 2020 outlooks highlighted the importance of finding under-loved stocks with solid fundamentals opposed to the high-premium, high-growth equities that fueled the S&P 500 for much of the past five years.

But important to the Barclays outlook is easier monetary policy and lower interest rates, which in general make equities more attractive and the onus of debt easier on corporations. Deshpande characterized the current environment as an "easy soft patch," or a time when the Fed cuts interest rates to give the economy a boost without a full-blown recession.

When the Fed eases during such soft patches, equity markets rally significantly over the next year (20% on average), the strategist wrote. And in many respects, Deshpande wrote, the price action in 2019 resembles the dynamics during previous easy soft patches.

"The three 'insurance cuts' this year from the fed seem to have stabilized sentiment," the strategist wrote. "We see that the range of market returns during soft patches is still generally consistently positive two years after the start of the fed easing cycle."

The strategist also upgraded industrials to an overweight rating and financials to a market rating; he downgraded communication services (excluding Facebook, Amazon, Netflix and Google-parent Alphabet) to underweight.

"The manufacturing slowdown sweeping across the globe appears to be stabilizing and fears of a spill-over into the services part of the economies have somewhat abated," Deshpande continued. "As a result, the recessionary concerns priced into equity markets seem to be receding rapidly."

The brokerage is also overweight health care and underweight energy, materials, utilities and real estate.