Photographer: Sukanya Sitthikongsak / Moment / Getty Images
Photographer: Sukanya Sitthikongsak / Moment / Getty Images
You are never sure what gains the seasons will bring. Hence their volatility. But one thing is certain about the results of the first quarter to be revealed. It could not count less for current market valuations.
And while there is a cliché on Wall Street that “guidance is what matters,” this view is taken in absurd ways right now, when the S&P 500 is pricing profits that practically can’t materialize in two years. This is a level of faith in the future, on which history offers little basis for justification.
Here’s the math. Based on existing analytical forecasts for earnings for the full year 2021, the S&P 500 trades at estimates almost 24 times, among its highest valuations. To reduce the 16-fold long-term average of annual profits, companies in the gauge will have to earn about 15% more than capital researchers currently expect to earn – in 2023.
May? Yes. Using a compound compound growth rate starting in 2019, this is part of the approximately 6% increase in revenues historically generated by S&P 500 companies over time. But are there good reasons to suspect that someone has a convincing opinion about what will happen in a certain two-year period? It’s more cloudy. Given how much this perspective is based, investors would be wise to consider what the market is currently demanding.
“What we’re talking about in mathematical terms is really a psychological phenomenon,” said Lawrence Creatura, a fund manager at PRSPCTV Capital LLC. “It can be seen mathematically that there are more disadvantages on the market than in March 2020, although ironically feels exactly the opposite. ”
Indeed, investors pour a a record amount of new money in stocks this year, amid hopes that vaccines and policy support will bring the economy back to normal. Their willingness to pay for earnings made the S&P 500’s P / E ratio almost 20% above its peak in the last bull market. Not that ratings are a good timing tool, but with so much optimism, the risk of these estimates not being met is more dramatic.
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Hypothetically speaking, if earnings fail to recover and the market’s multiple return to “return to normal” – the long-term average of 16, the S&P 500 risks losing a third of its value.
“Earnings are completely critical, and that’s what you’re going to have to focus on right now,” said Jeff Mills, Bryn Mawr Trust’s investment director. “Unless you keep seeing the basics delivered, you might notice a dramatic reassessment.”
Complicated issues are the Covid-19 pandemic and massive models of raising fiscal stimuli on Wall Street. It doesn’t matter 2023: even getting control over this year’s results proves difficult. Going by analysts studying individual companies, the S&P 500 profits will increase by 26% to $ 174 per share this year. Ask for top-down strategies that provide forecasts following macro indicators such as production and a there is a wide range: between 152 and 202 USD per share.
Even if we reach the top of the range of strategists, we will stop trading stocks for profits more than 20 times.
The huge gap is partly the result of an environment in which, one year after the pandemic, no one can confidently predict the sustainable strength of demand at home or the increase in consumer spending on stimulus controls. The measure of profit reached from the supply chain interruptions and rising commodity costs are also big wild cards.
Banks, including JPMorgan Chase & Co. and Citigroup Inc. start reporting next week. Profits in the first quarter of S&P 500 companies will increase by 24%, the fastest in 2018, according to analysts’ estimates compiled by Bloomberg Intelligence. Leading the package are carmakers, retailers and banks whose revenues have probably doubled from a year ago.
Analysts’ earnings estimates suffered surprisingly during the pandemic – although the fact that they proved too conservative is a heavy burden for oxen. They underestimated America’s corporate earning power by an unprecedented 20% average in the last three quarters of last year. In the five years before 2020, they missed only 3%.
“Analysts have been extraordinarily pessimistic about the outcome, and companies have been remarkably resilient in their ability to sustain their spending and discover new revenue streams,” said Jack Manley, global market strategist. at JPMorgan Asset Management, in an interview on Bloomberg Television. “I don’t anticipate that this story will deviate much at least in the coming quarters.”
That optimism resonates in the market. While corporate profits for more than 12 months have not yet managed a full recovery, the S&P 500 is already 20% ahead of its pre-pandemic peak. No matter how confident the investors are, the truth is that when you look so far, nothing is really known.
Quite simply, the further the forecast is in the future, the less accurate it is. Since 1990, the one-year profit projection for S&P 500 earnings among analysts surveyed by Bloomberg has missed real results by an average of 14%. Two years later, the offense doubled.
The current fiscal and monetary policy is added to the challenge. While all incentives are the basis for the recovery, it makes it more difficult to identify a discernible economic trend after the initial comeback, according to Michael O’Rourke, chief market strategist at JonesTrading.
“Investors will not be able to quantify what aspects of growth, earnings and the economy are organic and what aspects are the result of a simulated world in which monetary and fiscal excess artificially creates a facade of health and wealth,” he said. “There will be no real clarity for a few years.”
– With the assistance of Olivia Raimonde and Claire Ballentine