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Profit Reckoning Nears For Corporate America
I've mentioned the prospect of a reprieve for beleaguered equities in the near-term.
Sentiment is obviously subdued, bear markets abound and generally speaking, positioning is light. Much depends on Fed rhetoric, which is in turn a function of the incoming data, virtually all of which now presents event risk. Further evidence of inflation's persistence is conducive to policy panic, as is jobs data showing workers remain scarce and demand for labor robust. At the same time, figures which suggest
I heard through my work that we are in the midst of a cardboard shortage. Laptops we had ordered were on backorder for months, not because the equipment was unavailable, but because there were no boxes to ship them in.
A lot of our problems now are neither monetary or fiscal… A man with a hammer sees nails everywhere….
Ukraine and Russia are major suppliers of neon gas and palladium, vital elements in chip and computer manufaturing…
I’ve mentioned this before, but using 2023 consensus estimates, the aggregate and market cap-weighted SP500 will by 2023 have grown revenue by 30% and EBIT margins by 400bp since 2019. That looks like “over-earning”, and in my opinion it is very unlikely to play out that way.
The market is sniffing out the coming estimate cuts for 2023, even if analysts aren’t there yet. My first cut suggests that a return to normalized i.e. 2019 margins implies 2023 aggregate EBIT estimates are 18% too high, and adding a topline slowdown in 2022+23 implies larger EBIT estimate cuts.
The SP500’s -23% decline to date barely discounts the likely estimate cuts, without even including the multiple contraction implied by slower growth, estimate cuts, and rising rates.
There will surely be some bear market rallies on the way to the SP500’s final trough, but I don’t think they should matter much except to very short-term traders.
My bottoms-up SP500 model keeps pointing at fair value between 3200 and 3400, and prices typically overshoot FV.
I had thought the sort-of-optimistic scenario was that rapidly declining inflation or rapidly deteriorating employment allows or forces the Fed to prematurely stop its tightening and shift to easing. With inflation unrelenting, jobs still very strong, and the default rate hike 75bp, that seems less likely. The other optimistic scenario, an end to the war and associated sanctions, looks not imminent.
I am planning for SP500 to get to the low 3000s this summer.
And do you have a parallel analysis/prediction for IWM (Russell 2000)?
No.
About 1/3 of R2G companies have negative earnings, and a large portion don’t have consensus estimates past 2024, so a rollup of company PE or DCF valuations to an aggregate conclusion doesn’t make sense. Or, at least, would require too many assumptions and interpolations.
As a practical matter, there’s no need (that I can think of) to have a fair value for R2G or even to try to figure out when R2G will trough.
Small cap won’t bottom until large cap does, so just work on figuring out the SP500.
When equities do bottom, pretty likely that many of best opportunities will be in small cap. But that’s individual company work not index work.
Thanks!