A growing economy and a supportive monetary policy should support global stock markets, leaving them to trade on fundamentals. Revenue growth remains healthy, which is consistent with continued strength in consumer spending. Strong revenue growth should also support growth in earnings, with the rest of 2019 expected to show faster growth.

The remaining question concerns valuations. Through most of 2019, high levels of consumer confidence drove market valuations higher. If current prices hold, we should finish the year at the upper end of the range typical of the past five years or so. But as confidence levels moderate and growth slows throughout 2020, we can expect valuations to drop down closer to the lower end of that range.

As a result, the S&P 500 is likely to end 2020 between 2,900 and 3,200. There is upside potential if valuations remain at the high levels seen recently. But downside risk exists, as valuations remain quite high historically.

The International Front

If the U.S. is likely to continue its slow growth path, what about international economies and markets? From a market perspective, valuations are generally cheaper abroad, which could lead to international markets outperforming those in the U.S. We’re already seeing signs of this outperformance. That said, there are risks on the international front. The trade war, if not resolved, will continue to weigh down global growth and markets, as would a U.S. recession. International markets are likely to deliver both higher reward and risk than U.S. markets in 2020, although results will be primarily dependent on what happens here in the U.S.

What Would A Recession Look Like?

The predictions above assume that the base case of continued growth and steady markets will hold. But if we do get a recession, what would it look like?

To start, it’s very unlikely to be as bad as 2008. Even in a recession, high employment levels and wages should keep consumer spending (at two-thirds of the economy) healthy. Business spending is already flat. Further, government spending growth should act as a cushion. In other words, a recession will probably be more of a deep slowdown than a collapse. This scenario is what we saw in the recessions of 1990 and 2000, and current conditions resemble those years more than 2008. The closest comparison, the 2000 recession, was not fun—but it was not like the crisis of 2008.

From a market perspective, we can draw the same conclusion. With interest rates low, stock market valuations have moved higher over the past several years. If S&P 500 valuations dropped to their lowest recent level, the index would decline about 18 percent—much less than the drops we saw in 2000 or 2008. Plus, a decline like this would be consistent with other S&P declines over the past couple of years. So, even if earnings decrease or if valuations drop further, we could conclude that the market impact of a recession would likely not be nearly as bad as in 2008.

Not A Bad Place To Be