Investors enter the heart of fourth-quarter earnings season optimistic that the world economy will pick up steam in 2020, a turnaround from last year that some hope can push stocks to fresh highs.
Early last year, revenue warnings by bellwether companies including Apple Inc. and Delta Air Lines Inc. exacerbated worries of a recession spurred by higher interest rates and mounting tariffs. Instead, a trio of Federal Reserve rate cuts between late July and Halloween and an initial U.S.-China trade deal drove a powerful market rally that caught many investors off guard.
Investors’ rosy global-growth outlook is now driving a remarkably placid stretch for stocks and fueling bets that gains can continue. The S&P 500 hasn’t recorded a 1% daily pullback in three months, the longest such streak since October 2018, and barely budged after a U.S.-ordered strike recently killed a top Iranian military leader.
The steady performance of major indexes to start the year shows how much positive trade and central-bank developments have shifted investor sentiment in the past 12 months.
“The stars are aligning,” said Candice Bangsund, a portfolio manager at Fiera Capital, which has maintained larger positions in stocks and emerging markets than the benchmarks it tracks. “Our base case is for a revitalization in global growth in 2020.”
After comments last week from the U.S. and Iran indicated tensions were subsiding for now, the S&P 500 rose to a fresh record Thursday. It is up 26% in the past year, after edging lower Friday. December surveys of fund managers and individual investors showed both groups holding larger-than-average positions in stocks, according to Bank of America and the American Association of Individual Investors.
Concerns that U.S. stocks are too pricey are likely to persist, with the S&P’s valuation based on companies’ earnings in the past 12 months recently hitting its highest level since August 2018. It is still well below levels from early that year, and few see indicators of the euphoric sentiment that can cause swift pullbacks at the first sign of trouble.
Assets seen as safer, such as gold, also have climbed, with many investors seeking to hedge against a market downturn. That hasn’t materialized yet, with an extended period of sturdy growth and low inflation fueling steady gains.
“Until you see confirmation that it ends, I don’t think you try to get ahead of it,” said Tom Plumb, president and portfolio manager at Plumb Funds, which has recently been increasing its holdings of payment companies like Visa Inc. and defense firm Lockheed Martin Corp.
Stocks will be tested by a spate of profit reports starting this week, with results from the nation’s biggest banks including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. Fourth-quarter earnings for S&P 500 firms are expected to fall slightly from a year earlier, FactSet figures show, extending a trend from the previous quarters of 2019.
Investors will be eyeing corporate projections for this year as well, with some wary that current targets are too lofty. Profits are expected to rise 4.6% versus a year ago in the first quarter, and 6.4% in the second quarter.
December figures on retail sales and industrial production will also offer a new look at growth. Consistent activity outside the manufacturing sector has fueled confidence the economy will avert the sharp slowdown some have expected for months. Data on Friday showed employers added 145,000 jobs last month, fewer than the 160,000 economists expected, but the unemployment rate stayed at a 50-year low.
“We believe there is a sense of stability in our industries that has arrived,” Winnebago Industries Inc. Chief Executive Michael Happe said on the company’s most recent earnings call last month. “American consumers have shown tremendous economic resilience.” Shares of the company have risen 90% in the past year, with the maker of recreational vehicles reporting a larger-than-expected increase in sales for the quarter ending in November from a year earlier.
Other notable stocks have posted similar eye-popping gains in the past 12 months, including Apple, which has more than doubled since its downbeat sales guidance in early 2019. Better-than-expected results from Apple’s services business and products other than the flagship iPhone have boosted the stock, which accounted for nearly 8.5% of the S&P 500’s total return last year.
Some investors expect Apple and other companies that earn large portions of their revenue overseas to benefit from a pickup in growth internationally. Risky investments more tied to the world economy such as commodities and global stocks could also rally after investors preferred more stable U.S. assets in 2019.
“The reversal of some of that flow is going to be a huge factor,” said Liz Young, director of market strategy at BNY Mellon Investment Management. Ms. Young said the firm is optimistic about European stocks, believing they will be undervalued as long as Germany, the region’s bellwether economy, can avoid a recession.
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Despite worries that U.S. indexes are overpriced, some analysts are hopeful valuation figures will look more favorable later this year, when profits are expected to begin growing solidly again. The risk of missing out on gains was illustrated again last week, when major indexes surprised some investors by brushing aside worries of an extended conflict in the Middle East.
“People feel very comfortable,” said Omar Aguilar, chief investment officer for equities and multiasset strategies at Charles Schwab Investment Management. “That seems to be taking over.”
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
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