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Stock Market Predictions 2020 [Best Rebound Stock Sectors]

How to make your own stock market forecast for 2020

Which are the sectors of the economy that will rebound the fastest? Can stock market predictions and a little market history help you take advantage of the lower prices for huge returns in the rest of the year?

In this video, we’ll look at some stock market predictions from other investors as well as analysis by Wall Street professionals. I’ll show you how to make your own stock market forecasts and how to use that to invest.

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The Importance of Stock Market Predictions to Guide Strategy

Today’s question comes from Duane and it could be one of the most important to ask yourself right now as we try finding a way out of this 2020 stock market crash. Duane asks which markets will recover first and would it be possible to use a sector investing strategy for returns in those early winners then shift to the ones rebounding later?

How to Make Stock Market Predictions
How to Make Stock Market Predictions

I love this idea of sector investing, looking for the stock sectors that will recover faster, that will benefit from the two-trillion plus in stimulus money. The idea that you can take a quick position in some of those stocks AND THEN, then take your profits to roll into some of those sectors that benefit later in the recovery.

And what’s great about this strategy is it’s so much easier and takes less time than trying to pick those individual stocks right off the bat. For example, you can try to pick the next hot stock out of the 3,500-plus tradable on the U.S. exchanges but where do you start? It’s a crap shoot, digging into the financial statements of each.

But if you can find the sectors of the economy, those big groups of companies like utilities, consumer staples, technology or financials, find those sectors that are going to benefit first, then that narrows your list of stocks to buy down to a few hundred. From there, you can focus on just that group to pick the best of breed in the sector.

Even better though, is that this type of analysis is so much more certain. Honestly, you gotta be the love child of Stephen Hawking and Warren Buffett to bat more than 500 on individual stock picks BUT it just takes some simple analysis to understand which sectors will benefit from those big, universal forces in the economy. Understand those big economic forces that are driving all the stocks in a sector, and you know you’re going to get strong returns no matter what stock you buy in that sector.

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Stock Market Forecasts from Main Street Investors

So first we’ll look at some of the responses we got from the Facebook group, which sectors you in the Bow Tie Nation think will rebound first. Then I’ll share my own list, look at some great research from Wall Street analysts, and put together an investing strategy to take advantage of all this.

We’ve got more than 6,000 in the community there on Facebook so got some great responses. Matt thinks consumer staples will rebound first with financials and real estate being the last sectors to recover.

Sibbelina and Michael both put tech as one of the first to recover. One of our founding members of the Bow Tie Nation, GE gave us his whole list here with staples, communication services and tech topping the list while materials and real estate are last to recover.

Some great responses so join the group and take a look but I created kind of a heat map showing the timeline for sector recoveries. Most were pretty clear that tech stocks would be quick to recover followed by staples, communication services and utilities.

Stock Market Forecast 2020
Stock Market Forecast 2020

The middle group of sectors didn’t get a lot of votes but people were more confident on the laggards here with financials getting the most votes for last to recover. Next were real estate stocks and consumer discretionary for the slowest to recover.

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How to Make Stock Market Forecasts

Now I want to show you some investing resources to help you in that idea of creating your own stock market predictions and look at these sectors. Then I’ll share my reasoning for which sectors I think are primed to move higher and which will follow.

I’ll be using the FactSet Earnings Insight report for a lot of these charts, it’s an excellent bi-weekly survey of analyst estimates and stock market forecasts. It’s totally free, just search on Google for FactSet Earnings Insight.

First I think it’s important, anytime you’re making a stock market forecast, is to start with current valuation. So a lot of investors are looking for cheap stocks but if we look at the forward price-to-earnings ratios, that’s the current price of stocks divided by earnings expected over the next year, stocks aren’t necessarily cheap at this point.

Stock Market PE Ratios 2020
Stock Market PE Ratios 2020

We’ll leave that energy sector because earnings are expected to just crater to zero so the chart is thrown off there but look at these other sectors. The consumer discretionary sector is trading at a price of 23-times earnings, that’s the dark blue bar, and you can compare that against the 10-year average PE ratio in this green bar. So over the last ten years, the consumer discretionary sector has traded around 17.5-times forward earnings and right now, stocks are priced at 23-times? That’s still pretty expensive even as these prices have come down.

Some of the sectors are a little closer to their averages, so consumer staples is trading at 18.7-times earnings against a long-term average of 17.4-times. Most of the sectors are trading at around 15% higher than those long-term average except for health care and financials, those are the only two trading at or below their long-term average PE ratios.

So it’s not just when you think sectors will rebound but where they’re starting from as far as prices. Even if technology should recover quickly from the recession, stocks in the sector as a whole are already trading for almost 20-times earnings, which is 30% higher than the long-term average, so rebound yes but they might not have far to rebound.

Next we can look at analyst estimates for earnings and obviously the picture isn’t pretty but I think it’s a really great perspective on which sectors are being hit hardest and which are relatively safer.

So we see that analysts expect technology, healthcare, utilities, staples, communication services and real estate to still post positive earnings for the year. Against that we see the biggest weakness in consumer discretionary, industrials, financials and energy.

And if we compare those expectations with another chart of earnings expectations for next year, we see some really interesting differences.

And you almost see a mirror image with energy, industrials and discretionary expected to post the best profits next year versus those sectors that did the best this year maybe lagging a little.

So obviously, Wall Street analysts are forecasting strong economic growth next year and for some of the hardest hit sectors to bounce back.

We’ll look at one more graph here before the actual stock market returns analyst expect from each sector and I think this one is even more important in that it shows you where profitability is going for these sectors.

So you see here the profit margin for each sector, the first quarter 2020 profitability is in dark blue, with the comparison quarter from 2019 in grey. And most interesting here is that some of these really haven’t seen their profitability get hit too hard, so maybe an idea that these sectors can bounce back more quickly than forecasts when revenue returns.

These strongest sectors in terms of profitability are real estate, IT, utilities and communication services.

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2020 Stock Market Predictions from Wall Street

Now the actual return predictions for each of the sectors according to stock market analysts and then I’ll reveal which sectors I think can recover and which offer the biggest opportunities for investors.

2020 Stock Market Predictions
2020 Stock Market Predictions

So the fact that communications services is doing well with a 23% expected return shouldn’t surprise anyone. Many of these companies in internet and telecom are actually benefiting from everyone being online.

What’s really interesting here is the fact that analysts expect stocks of financial companies and consumer discretionary to do so well over the next year, returns of 23% and 19% on each.

Part of this is just valuation, so the fact that stocks of financial companies are trading so low on a PE basis, but you’ve got to wonder whether these two sectors can really outperform the rest. Yeah, they’re coming from a lower point so have more room to rebound but the earnings picture is still not good so I’m not sure I’d be betting on these two and you’ll see that in my own predictions next.

We see analysts have a forecast for the broader market, the S&P 500 to return 17.8% over the next year, which takes us to about 3200 – still a little below the high in February but a nice return.

It’s also interesting that even though energy has been beaten down so far that analysts are expecting it to be the second-worst sector on returns. Honestly I don’t think this really makes sense because if analysts expect such a strong economic recovery and a rebound in these other sectors, then that should really drive demand for energy products and this one should snap back.

Where are Stocks Heading in 2020?

So that’s Wall Street’s stock market forecast, now I want to go through each of the sectors, show you which I think will rebound that fastest and why.

Consumer Staples, Healthcare and Technology are down less than 5% YTD versus an 11% market drop so these sectors are probably already in their rebound.

I think stocks of utilities companies is one of the hidden opportunities in the market. The sector is down 6% YTD on fears of lower business demand, which is certainly founded, but these companies are regulated and will still make a profit. Strong safety companies with solid yields.

Communication services is also very interesting because while it’s down almost 10%, a lot of these companies are positioned to benefit from the shelter-in-place like Netflix, Electronic Arts and Alphabet.

Stocks in the industrials and materials sectors should be fairly quick to rebound also. These are cyclical sectors, which means they follow the economy closely. As all that stimulus money starts hitting business, and as business starts getting back to work in the first place, these sectors should start looking better.

I think the energy sector is another one of the hidden opportunities right now. Analysts are expecting it to post the second-lowest return over the next twelve months and the sector has lost almost half its value so far this year…but if you’re looking to buy when there’s blood in the streets, this is definitely the sector to do it.

It’s also where you’ll need to do the most research though because a lot of companies aren’t going to make it. Pay attention to the balance sheet, how much cash a company has on hand, and that 10-K annual report for how much debt needs to be repaid or refinanced over the next year. Those two will be your best insight into survivability.

Stocks of financial companies, so banks and insurers mostly, might see a lot of loan volume with interest rates at rock-bottom but they’re not making any money off it. With long-term rates as low as short-term, banks can’t make money and insurers can’t find anything safe to invest in with their cash. Now the one good thing about this recession is the financial companies were in a very good place as far as capitalization and loan losses so you’ve still got strong companies, they’re just not making any money.

Real estate is probably looking at a year of difficulty in the rebound just because it’s such a lagging sector. Leases for commercial space are long-term which means rent rates don’t come down as fast but they stay weak for longer as those lease contracts gradually expire and tenants renegotiate. Residential real estate will get hit on the rent forbearance and prohibitions on evictions but should then rebound fairly quickly.

Consumer discretionary is a real wildcard because there are some here like Amazon and eBay that have done very well this year. Plus there are some like McDonalds that should rebound fairly quickly as people get back to work and outside. But a lot of the retailers, the department stores and stores that are typically in malls – those companies are in big trouble. They had razor-thin profit margins and high debt as it was and with high unemployment, retail sales aren’t just going to snap back. Think about it, if strong brands like Toys R Us and Macy’s couldn’t cut it when the economy was growing, there’s no room here for even a recession, let alone having the stores closed for several months.

So when you’re trying to make a stock market prediction from all this, remember that the market isn’t really that far off its highs in the first place. Analysts are expecting earnings to be down nearly 10% in 2020 and yet the stock market is only off those February highs by about that much.

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So if you’re looking for stocks to rebound, there might not be a lot of rebound left. The S&P 500 is trading at 17.3-times expected earnings, which is already above the 10-year average of 15-times forward earnings, so we’re not exactly in value territory like we were mid-March. Don’t rush in to any stocks on fear of missing out and save some money back for another stock market crash if we get one. Use the stock market analysis in this post as well as your own stock market predictions to make informed decisions on how to invest your money.

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