Earnings estimates for 2020 and 2021 continue to fall, and that doesn't paint a rosy outlook for the stock market.

Earnings Estimates Decline Further, Pushing Stock Market Valuations Even Higher

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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May 25, 2020

Stocks – AAPL

Macro – SPY



My view on the stock market much of this year has been shaped by earnings estimates for the S&P 500 and the economic landscape for 2020 and 2021, both of which I have no control over. So until those trends begin to improve or at least show a hint of improvement it is hard to for me get overly positive. The bad news is that earnings estimates continue to fall based on the latest data from the S&P Dow Jones. As of May 21, earnings for 2020 are now expected to fall by 30% to $110.62, which is the earnings number I had been targeting since sometime in mid-March. The big question is what is in store in 2021. Currently, S&P Dow Jones is modeling $162.52, which is really supporting this market and likely the reason why the S&P 500 has stopped rising. At its current level of around 2,955, the index is valued at 18.2 times 2021 earnings. That is high, but no obscenely high. Since 1987 the index has traded with an average one-year forward PE ratio of about 17.5

S&P 500, spx

As long as earnings for 2021 can manage to hold those earnings estimates, then the market can probably drift within this current region. But if those earnings start to move lower again, than it seems that the S&P 500’s valuation will need to rise dramatically into an expensive territory, or we will need to see the index begin to drift lower.

The big question is if you believe that earnings in 2020 are going to fall less than they did in 2008, even though the GDP is 2020 is expected to fall significantly more than it did in 2008.


So if you are in the camp that earnings can snap back sharply in 2021 back to 2019 levels, then you should be good, and not have much to worry. Call that a “V” shaped recovery scenario, as current earnings estimates are pricing in.

My biggest concern is that many companies pulled their guidance for 2020, and we simply have no idea how these earnings will continue to come in the rest of the year. Take Apple, for example, the company has issued no guidance, yet analysts have their earnings growing to $12.34 in 2020, up from earnings from $11.89 in 2019. However, earnings are forecast to grow by almost 20% in 2021 to $14.80 per share. But let’s say, as the year goes by and those 2021 estimates begin to fall, dropping to say $12.20 per share, I’m picking a number here, Apple itself would lower the S&P 500 earnings estimates by around $1 per share. So do that over the entire S&P 500, and you can see that there is still a good chance for 2021 estimates to continue to decline.

The bottom line, if analysts are less certain than normal about current earnings estimates, then it is also possible that 2021 estimates are too high.

S&P 500, eps

So just keep an eye on those earnings, as they go, so does the stock market. At least that is how it is supposed to work. Hey, if earnings bottom out and they start to rise, that would be great, it would undoubtedly make me more optimistic and bullish. I just don’t think that is likely to happen.


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