March 14, 2020
Stocks – None
Macro – SPY
- 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.
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