Money managers aren't expecting much when U.S. companies report their latest quarterly results over the next several weeks.
But for the bull market to continue its more than decadelong ascent, they are leaning on one crucial assumption: that corporate earnings growth will pick up over the next couple of quarters from its current near-zero rate.
Companies in the S&P 500 are projected to report a 2% decline in earnings in the fourth quarter from the year-earlier period, according to FactSet estimates from Friday. If that pans out, it would mark the fourth straight quarter of declining earnings--the longest such streak since a period from 2015-16.
Stocks have managed to rally nevertheless. The Dow Jones Industrial Average's rise this year has left it less than 4% away from crossing 30000 for the first time. The S&P 500 and Nasdaq are also trading near all-time highs, extending gains after a banner 2019.
"Whatever return we got last year, it was against the backdrop of almost no earnings growth to speak of," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group AG, which has among the higher forecasts of Wall Street analysts for stocks' 2020 performance.
One key reason why: Investors have penciled in a turnaround in profits for this year, thanks to signs that growth around the world is stabilizing and trade tensions between the U.S. and China are easing.
Analysts expect earnings to grow by 4.6% in the first quarter from the year-earlier period and by 6.4% in the second quarter, according to FactSet. And while it is still early, they expect even more impressive gains for the year as a whole. Estimates suggest the S&P 500's earnings could grow by 9.4% on a year-over-year basis.
"The confidence that investors have in the re-acceleration of the economy and profits hasn't been shaken, and you need that to justify prices where they are and to continue to see positive performance in 2020," said Thomas Hainlin, global investment strategist at Ascent Private Capital Management at U.S. Bank.
That being said, "the bar is set pretty low in terms of expectations for earnings," Mr. Hainlin added.
Banks are poised to report among the strongest results in the fourth quarter, while manufacturers, energy producers and materials firms are expected to post among the biggest declines in earnings. In addition to the biggest U.S. banks, Delta Air Lines Inc., UnitedHealth Group Inc. and Alcoa Corp. are among the companies scheduled to report this week.
For 2020, analysts say to expect a reversal in fortunes. According to FactSet, analysts estimate earnings in the S&P 500 energy, industrial and materials sectors will grow by double-digit percentages, leading the projected rebound among the S&P 500's 11 groups.
In a separate analysis, Credit Suisse said it expects multinationals with more foreign exposure to report earnings growth of 9.4% in the first half of the year, compared with more domestically focused firms, where it believes earnings will increase by 5.7% in the same period.
The rosier outlook for some of the S&P 500's groups rests on the assumption that factory activity and industrial production will stabilize in 2020 after dropping off markedly around the world last year.
Trade tensions between the U.S. and China and the suspension of production of Boeing Co.'s troubled 737 MAX jetliner both weighed on manufacturing activity in 2019, in turn hurting earnings and share performance for a number of industrial companies. Heavy-machinery maker Caterpillar Inc., for instance, finished the year up 16%, while Boeing rose a scant 1%. That was well behind the S&P 500, which finished the year with a 29% gain.
Just weeks into the new year, though, there are signs that the outlook is improving.
Data earlier in the month from IHS Markit showed U.S. business activity grew in December from November, thanks to a rise in new order volumes and demand from clients. Surveys have pointed to a pickup in manufacturing output in China, a hopeful sign for growth elsewhere in Asia. And the World Bank estimates the global economy will pick up by 2.5% this year from 2.4% in 2019, boosted by a gradual recovery in investment and trade.
If key readings of manufacturing activity rise in 2020, "that's going to be a very powerful driver of market upside," said Credit Suisse's Mr. Golub.
Of course, there is always the potential that economic growth falls short of analysts' projections--especially if the U.S. and China's trade negotiations hit a wall. With stocks trading at higher-than-average valuations, many analysts are left wondering if modest earnings growth will be enough to push the stock market much higher in 2020.
For context, the S&P 500 ended Monday at 3288. That is less than 4% away from where BMO Capital Markets and Goldman Sachs Group Inc. predict the S&P 500 will close out the year.
"To us, it looks like quite a bit of the rebound is priced in already," Mr. Hainlin said.
