(Bloomberg) -- The equity rally that’s built on hopes for a growth rebound won’t last as the U.S. economy is heading for a “mild recession” next year, according to Societe Generale.
While the S&P 500 might climb to 3,400 in coming months amid buoyant sentiment, the market will then reverse course as the economy contracts in the second and third quarters of 2020, the firm’s strategist Sophie Huynh predicted. As a result, the benchmark index may experience a decline of at least 10% before recovering to finish the year at 3,050. The year-end target represents about a 2% loss from current levels.
“We cannot rule out a melt-up to 3,400 in the coming months as the story around a fourth mini-cycle gains momentum,” Huynh wrote in a note, referring to expectations that the economy will follow a similar growth path after a slowdown, as in the case of 2009, 2013 and 2016. “However, we would not expect this move to last.”
The strategist is the third among those tracked by Bloomberg expressing caution over the market’s outlook in the new year. Mike Wilson at Morgan Stanley and Francois Trahan at UBS Group AG both predicted the S&P 500 will post declines by December 2020, saying share prices can’t sustain gains with growth stuck.
After a 24% rally this year, the S&P 500 is now traded at 17.7 times forecast profits, a multiple that’s higher than any time in the past decade except for late 2017 into early 2018. Shares have surged as the Federal Reserve cut interest rates three times and the U.S.-China trade wars eased.
Profit growth for S&P 500 companies will stay anemic in 2020, rising 1.8% to $164 a share, SocGen estimated. Investors should avoid tech and small-cap stocks, and favor consumer staples over discretionary shares, Huynh said.
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