RBC sees volatility as U.S. stock market forecast to lose steam

NEW YORK The U.S. stock market’s record-setting rally will lose some steam in 2020, with the risk of a pullback increasing in the next few months, according to RBC Capital Markets.

Lori Calvasina, the firm’s head of U.S. equity strategy, predicted that the S&P 500 will finish next year at 3,350, a gain of roughly seven per cent from Tuesday’s close, while profits will grow six per cent to $174 a share.

With valuations expanding and fund managers turning “euphoric,” investors should watch out for a market retreat that’s bound to occur by the end of March, she warned. “We expect 2020 to be a year of moderation, turbulence and transition in the U.S. equity market,” Calvasina wrote in a note to clients Wednesday.

“Risk of a pullback near-term is quite high in our opinion. If a pullback doesn’t occur by the end of 2019, as we’ve anticipated, then we suspect it will come in 1Q20.”

Calvasina is the latest Wall Street strategist to warn that the momentum behind the S&P 500 will be hard to sustain after a 25-per-cent surge in the first 11 months of this year. While Federal Reserve interest rate cuts have emboldened bulls, allowing them to look past stagnant growth, the economy still hasn’t shown the signs of an acceleration that would underpin a revival in corporate profits.

The 2020 presidential election is also likely to create volatility in a market that’s already routinely being whipsawed by trade headlines.

Among strategists tracked by Bloomberg who have provided their forecasts for next year, three expect the S&P 500 to be lower in 13 months than it is today.

Even the most optimistic, Jonathan Golub at Credit Suisse, projected gains running at less than half the rate seen so far in 2019.

We expect 2020 to be a year of moderation, turbulence and transition in the U.S. equity market.

His target stands at 3,425, implying a nine-per-cent increase.

The way Calvasina sees it, the S&P 500’s latest breakout to new highs has prompted institutional investors to pile into equities. Fear of missing out is evident in the futures market, with asset managers boosting exposure above levels that had spelled trouble for stocks.

In the previous four instances when their positions were as elevated as now, losses followed, RBC data showed. “This keeps us on guard for a period of significant consolidation near-term, and will be an overhang on 2020 performance if not resolved before year end,” Calvasina wrote.