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March 14, 2020
Stocks – None
Macro – SPY
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Here are some recent Reading The Markets Premium Headlines:
- Not Out Of The Woods Yet, Risks Remain Elevated
- Relief Rally – Morning Commentary 3.13.20
- Is A Massive U-Turn Coming? Earnings Model Update
- Going Live Again For Q&A
The market is likely to continue to go through a process of trying to reconcile the potential impact the virus may have on the economy. I have been running through my models all week with premium subscribers. At this point, my model’s worst-case scenario is currently forecasting no growth in 2020, or roughly $158.60 per share, which is basically in line with 2019 earnings of $157.10 in 2019, while forecasting growth of 11% in 2021 to $176. It means using a PE ratio of 16; the S&P 500 is worth roughly 2850.
However, I have been working through some other scenarios, where I assume earnings contraction in 2020. Those models also seem to suggest that downside from the recent lows is relatively limited. Since 1988 a modest recession, such as in 2001, resulted in earnings for the S&P 500 falling by roughly 30%. Meanwhile, a period of slowing economic growth like in 2015 and 2016, led to earnings contractions of around 10%.
In a scenario similar to 2015 and 2016, where we don’t get a recession, but slowing GDP growth to say around 1 to 1.5%, it seems fair to say that perhaps earnings could take a 10% hit from 2019 levels and assuming a modest 10% earnings rebound in 2021, then we could have 2021 earnings of about $155.57. Using a historical PE of about 16, we could value the S&P 500 at around 2,520.
In the worst case, 2001 scenario, and earnings collapse by 30% and see a more significant rebound in 2021, by around 20%, the S&P 500 would be valued at roughly 2,130.
I don’t think we are in a 2001 type of scenario. It seems possible that we are in a 2015-16 situation, but that may even be a stretch. Perhaps, a modest 5% decline in earning in 2020 and a 10% growth in rate in 2021, the S&P 500 would be valued at around 2,650.
Where the S&P 500 could fall too depends on where you think the economy is heading. But out of all the scenarios I have run, it seems that more than likely the S&P 500 has likely overshoot the potential impact to earnings. The index reached a low of 2,478 this past week. In only one scenario, does the S&P 500 fall below that low. In the scenario where earnings fall by 30%.
As I said, my model, which updates everyday is suggesting in a worst-case scenario, no growth in 2020 and growth of about 12% in 2021, and an S&P 500 valued around 2,850. So take it for what it is worth. I will continue to update these numbers throughout the week and keeping paying members in the loop.
Have a great weekend.
-Mike
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.