As we look at the earnings for S/P 500 companies, the slow growth of 1.0% for 2019 appears to be improving in 2020 (FACTESET December 20, 2019). The Index earnings are now expected to grow to 178.21 in 2020, up from 162.78 in 2019. This 9.4% growth forecast is well above the slow growth achieved in 2019. The more optimistic forecast is based on reduced uncertainty arising from the U. S. -China trade dispute and continued expectations for historically low interest rates. If the China trade talks do not result in a pro-trade settlement or if interest rates rise dramatically this year then the forecasts will prove to be unrealistic.
With the S/P 500 Index trading in the 3,240 area, the price-earnings multiple on 2020 forecasts is 18.2x, an historically high number. This high earnings multiple implies that the equity market levels are close to ‘topping out’ unless interest rates remain at current low levels (1.9% on the Ten -Year T bond). Investors are advised to follow this year’s earnings forecasts carefully since any weakness would drive the P-E multiples to unusually high levels.