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After Nosebleed Rally, Some Say It Can Only Go Wrong From Here
Is this as good as it gets?
That's a question being bandied about more and more as stocks continue to press higher after posting the best first half since 1997.
US equities rose for a fourth week in five as America celebrated George Washington's legendary assault on Cornwallis's "airports" in 1781. Equities wobbled on Friday after the blowout jobs number effectively took a 50bp Fed cut off the table in July, but by the end of the session, losses were pared and all was, generally speaking, well
Trump’s July 4th extravaganza. Emoluments to Trump Inc. paid for by the America taxpayers.
p.s. The Donald doesn’t pay taxes, remember?
The upside scenario, on a 1 year horizon, looks like 50 bp Fed cuts + tariff rollback + US data/estimates stabilize + ROW weak so TINA. Then if SP500 cons 2020 stays $1.85 and fwd PE returns to 2018’s 18X, bulls see SP500 at $3,300.
The base scenario looks like 25 bp Fed cut + tariffs unchanged (can gets kicked) + US data/estimates mixed (like now) + ROW weak. That’s SP500 cons 2020 $1.85 and fwd PE about 16X, implying roughly today’s SP500 $2,950.
The downside scenario is no Fed cuts + tariffs increase + US data/estimates decline + ROW who cares. Then maybe SP500 cons 2020 looks more like current 2019 cons $175 and fwd PE declines to 15X, bears might see SP500 at $2,650.
There’s outside scenarios too, for more upside (estimates rise, China caves, cap gain indexing, Fed bullied into “rocket fuel” cuts, etc) and more downside scenarios (estimates fall more, Fed cuts in vain, etc). And of course liquidity/unwind can easily drive prices below/maybe above these valuation scenarios.
What probability to put on the upside, base, downside and outside scenarios? Plug in your best guess and translate that to current portfolio positioning. I think for most investors it will lead to something moderately defensive but not batten-down-hatches defensive. I’d guess from the BAML survey etc, that’s probably about where most investors are.
Nice. Following your lead, I’ll add the “most likely” scenario: 5o bp Fed cut by eoy + tariffs unchanged (can gets kicked) . SP500 @ 3,100. Not sizzling but better than a stick in the eye.