“Global equity markets have staged a remarkable rebound”, SocGen’s Andrew Lapthorne writes, in a Monday note.
Following the surge off last month’s bear market lows, the Nasdaq 100 came into the new week very nearly positive for year. “Its market capitalization now exceeds that of the MSCI World ex-US for the first time ever!”, Lapthorne exclaims.
One of the key things to understand about equities right now is that it’s not so much the simple disconnect between stocks and the economy or even between stocks and earnings that’s the problem. As laughable as this sounds, there is some (and I emphasize “some”) merit to the notion that we should “write off” the second quarter, both in terms of the economic data and corporate earnings, although I have doubts (see here and here).
The more vexing problem is the distinct possibility that if we knew what earnings really were, we would discover that equities are trading not just at elevated levels versus temporarily depressed profits, but at a ludicrous multiple that can’t be justified by any otherwise plausible notions about “looking through” an anomalous quarter.
“We expect S&P 500 will show a 15% EPS decline in Q1 followed by a 123% plunge in Q2”, Goldman wrote Friday afternoon, adding that “most investors are already looking ahead to 2021 EPS”. This is really all just guess work right now, but if the S&P were to make it back to, say, 3,000 (to use a round number), that would mean investors were slapping a ~28X multiple on Goldman’s top-down 2020 EPS estimate – in the midst of the deepest recession in a century.
Things don’t seem so out of whack if you go by consensus bottom-up, but that’s an exercise in question-begging.
Remember, we came into the pandemic already in a (very shallow) earnings recession. The assumption, generally speaking, was that the path out would approximate the fabled “hockey stick” inflection.
Those dreams have been crushed. Have a look at this rather amusing juxtaposition:
Of course, the maddening part for skeptics of the original rosy assumptions is that now we’ll never know who was right and who was wrong. The virus has simply burned it all to the ground. You can sort through the smoldering ashes for clues as to what “ex-COVID” profits might have been, but you’re likely to come up empty (or sick).
As far as 2021 goes, we’re right back to expecting what, to the very same skeptics, sounds like a similarly outlandish inflection.
“We’ve been watching closely the evolution of consensus forecasts, focusing on estimates posted within the last 20 days [and] the latest numbers suggest 2020 global EPS forecasts have been cut by 29% and 2021 EPS estimates have dropped by 20%”, SocGen’s Lapthorne notes.
That, he observes, translates “into a 21% decline in profits this year, followed by a very uniform 21% rise in 2021”.
Suffice to say Lapthorne isn’t convinced. “By the end of 2021, profits are forecast to be almost back to where they ended 2019, give or take a few percentage points”, he goes on to write, before flatly asserting that “this will not be the case”.
No, probably not.
But, when it comes to equities, investors have been conditioned not to “fight the Fed”. There is, after all, something inherently futile about putting your money up against a bid emanating from the people who print money.
It’s not a matter of hewing to the old adage about markets staying irrational longer than you can stay solvent. Rather, it’s a matter of whether you’re prepared to bet against a price indiscriminate bid from the only folks in the market who cannot, by definition, run out of cash to deploy.
Still, Lapthorne reminds you that through it all, “there is zero evidence historically that markets can go up on a sustained basis whilst profits continue to slump”.
In addition to being worried about whether the economy/earnings recover as a V, U, hockey puck, nike swoosh, or a Z (haha), I am increasingly becoming worried about what the capital structures will look like. Even though plain vanilla debt might have a very low interest rate, the debt service could take all the cash flow.
Then convertible debt might take even more of the profits and cash flow. Add on equity offerings are, of course, dilutive.
Too scary for me.
The Fed does not operate without constraints. The Fed buying our way out this recession is both politically and economically untenable. Especially politically –Mulligans for all those who have disproportionately benefitted from Fed largess over the past 12 years will spark a backlash that will make the Tea Party look like a white glove afternoon social.
Anyone who thinks this is going to be one-quarter “event” needs to find a new financial advisor.
Georgia’s Governor opening the states businesses while the Covid cases are increasing. Madness. Trump’s failure to have America’s industrial might come up with enough swabs and reagent to do the testing they need. Inexcusable. Every day another lost opportunity. So frustrating. Is there no end to this nightmare?
To get an index of the enormity and consequences of Trump’s ineptitude simply compare the per capita death toll of South Korea, that meticulously followed WHO guidance and was glad to accept WHO testing assistance, and the US, which did not.