What’s up in the stock market? Pretty much everything!

Last week, large-cap stocks (S&P 500), mid-cap stocks (S&P 400), and small-cap stocks (S&P 600) all reached new 52-week highs. Breadth indicators for the index also reached new highs.

In other words, we are experiencing a broad-based rally in the stock market.

Momentum is also bullish for major market indexes. Weekly charts of the S&P indexes are shown below with stochastics at the bottom.

In strong bull markets, stochastics tend to move to high levels and then stay there for extended periods of time. For all three indexes, the position of the stochastics indicator is consistent with that trend; they all also show indications for additional gains. That means we could see this rally continue for weeks, delivering significant gains.

What The Data Shows For 2020…

For now, fundamentals support additional gains, and the analyst projections support the fundamentals. FactSet, Standard & Poor’s and others have already released 2020 earnings forecasts that are generally consistent with each other, but, for the purposes of this issue, I’m going to use the FactSet data. (Personally, I prefer the FactSet estimate because it provides data to show how the estimate held up over the year.)

For 2020, the companies in the S&P 500 are expected to report earnings per share (EPS) of $178.57. This would be 9.7% higher than 2019. Earnings are only expected to be just 0.3% higher this year than they were in 2018, so this 9.7% increase represents a significant jump in the growth rate.

Generally, the S&P 500 trades with a price-to-earnings (P/E) ratio between 15 and 20. Using those ratios to find price targets, we can expect the S&P 500 to end 2020 between 2,678 (15.5% lower than the recent price) and 3,571 (about 12.7% above the recent price).

Assuming the estimate is accurate, a double-digit gain in the index is likely over the next 12 months.

Digging Down Into The Estimates

Now, the first part of that sentence — assuming the estimate is accurate — is very important to keep in mind. Initial forecasts can be dramatically wrong.

Over the past 20 years, analysts have overestimated EPS by 6.9% on average. The initial estimate was too high 65% of the time.

But when you drill down into the data, it turns out that analysts aren’t what you might call “medium” wrong most of the time… they’re “majorly” wrong just a little bit of the time. The majority of the overestimation comes from big misses in three separate years. In 2001, analysts overestimated earnings by 36%. In 2008, the initial estimate was 43% too high and in 2009, analysts missed by 28%. Each of these was a recession year. Excluding these three years, the average miss was just 1.8%.

The chart below shows estimates and actual earnings from 2009 through 2020. In addition to the miss in 2009, we can see two more years with noticeable differences between estimate and reality. The 2018 and 2019 projections were also off by a significant amount — most likely related to tax reform. The law was passed late in 2017, and from there, companies needed some time to adapt to the changes. That made it hard for analysts to estimate the positive impact tax reform would have on 2018 earnings. Analysts had the opposite problem in 2019, factoring in sustained earnings growth due to the tax changes, but it turned out most of the impact was limited to the first year.

_{Source: FactSet}

My Outlook For 2020

So, what does this mean for the 2020 EPS projection?

My thought is that the estimate won’t be too far off the mark… unless there is a shock to the economy.

Trade wars and impeachment are still volatile situations in an election year. North Korea is a potential source of conflict. Latin America is increasingly unstable.

However, there’s no rule saying the “shock” has to be a bad thing. With so much bad news, I did have to reach to find a positive potential surprise in 2020, but I can at least see the possibility of a positive surprise. The recent election in the United Kingdom means Brexit is likely to happen early next year. A trade agreement between the United States and the U.K. could give newly-elected Prime Minister Boris Johnson strength in his negotiations with the European Union and would boost the U.S. economy.

I have to tell you… it feels good to be able to articulate a possible bullish surprise after years of negative sentiment in forecasts.

For my money, I believe we’re likely to see some upside in the new year, along with some downside. My forecast for the next 12 months is actually for a melt-up in the stock market, followed by a meltdown.

For now, we are still in the early stages of the melt-up. The next few months should be good times for the bulls.

P.S. One way to shift the odds in your favor as we head into 2020 is to try new strategies. And my colleague Jim Fink just told me about one you’ll definitely be glad to have in the months to come…

It has to do with a “weird” indicator that just pinpointed an opportunity for gains of 100% in the next 10 days or less. And even better, he’s made trades like this twice a week, every week, like clockwork for years now. In just a few days, the full details will be released to a small group of investors. To discover how to get the next trade in your inbox, simply click here.