Fourth quarter earnings season kicked off this week with 24 S&P 500 Index companies slated to report results. Our expectations are for a marginal increase in S&P 500 earnings per share (EPS) on a year-over-year basis, based on current FactSet consensus estimates (-2% year over year) and the average historical upside of roughly 3 percentage points.

We’ve become accustomed to meager earnings growth. As shown in the LPL Chart of the Day, if fourth quarter results are anywhere near expectations, 2019 will end up as a year with S&P 500 returns of more than 30% and no corporate earnings growth to speak of. That means expanding stock valuations drove the market’s gains last year, a trend we do not expect to continue.

“We expect earnings growth to drive stock market gains in 2020,” said LPL Financial Chief Investment Strategist John Lynch. “With valuations elevated, corporate America will probably have to do the heavy lifting to get stocks much above current levels.”

Accordingly, the key to this reporting season will be whether the optimistic growth outlook reflected in consensus earnings estimates for this year remains intact after companies issue guidance. Many companies will be commenting on 2020 for the first time. Our estimate of $175 per share in S&P 500 EPS for the entire year represents a 6–7% increase from our $165 forecast for 2019. Based on the latest consensus estimates, that growth rate may get pushed up a bit. We still think $175 is attainable if capital investment picks up after stalling last year and wage growth remains stable.

Trade progress may help. The United States and China will sign the phase-one trade deal later today. While negotiations on the next phase will be tougher and could even stall out, businesses would welcome the additional clarity that de-escalation can provide, something that clearly weighed on corporate profits last year.

Look for more on the earnings season in our upcoming Weekly Market Commentary on January 21. And follow our earnings season barometer on Mondays during reporting season here.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. The economic forecasts set forth in this material may not develop as predicted.

Please read the full Outlook 2020: Bringing Markets Into Focus publication for additional description and disclosure.

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This research material has been prepared by LPL Financial LLC.

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