April 25, 2020
Stock – None
Macro – SPY
Mike’s Reading The Markets Premium Content –
- Earnings Are Deteriorating, Market Is Not Cheap
- Evolution Of Earnings
- Earnings And Techincals All Trending Lower
As first quarter results continue to roll out and we near the apex this coming week, the outlook continues to grow to worse and worse. So far, 121 companies within the S&P 500 have reported results, with 81 having topped estimates, while 38 have missed, and just two have met. All of these numbers are significantly worse than their historical averages, with this quarter shaping up to be the worst quarter since the fourth quarter of 2013.
Earnings Estimates Are Melting
The S&P 500 is forecasted to earn $136.08 based on the latest data from S&P Dow Jones as of April 23 in 2020, and $170.87 in 2021. It leaves the index trading at roughly 16.4 times 2021 earnings, which is just barely below the historical average one-year forward PE ratio of around 17.
But again, earnings estimates have been falling sharply, and this trend is likely to continue as we continue to work our way through earnings season. It means that if the equity market is currently fairly valued, it is likely to continue to decline as earnings estimates continue to fall or it risks becoming grossly overvalued.
My earnings model is now projecting earnings of $129.50 in 2020 and $162.70 in 2021. But, my worst-case scenario model is now expecting earnings in 2020 of $113.63 and $144.77 in 2021. Both of these numbers are falling increasingly close to my target for earnings of $110 per share in 2020 and $137.50 in 2021 based on the typical earnings decline and rebounds in prior recessionary periods. It means that currently, the S&P 500 is trading at 25 times 2020 earnings and 19.6 times one-year forward estimates in this worst-case scenario.
Based on some of these estimates and trends, it seems more likely that S&P 500 should find itself trading around 2,400 to 2,500 in the weeks and month ahead, as earnings estimates continue to drift lower.
The economic data that continues to roll out suggests that the damage inflicted is steep and severe. It means that the destruction taking place to many companies will resemble as steep a sharp decline in earnings, and likely a slower than an expected rebound, with a “V” shaped recovery unlikely.
The most significant problem is that until there is a cure for the coronavirus or there therapeutic that effectively treat it, most people are likely to shy away from normal activities we took for granted just two months ago. That possibly means that certain parts of the economy will be slow to return to normal for some time.
It is worth remaining cautious and defensive in this current period and resisting the fear of missing out.
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