Stock Bulls is betting everything on troubled revenue assumptions

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You are never sure what benefits the seasons will bring. Hence its volatility. But one thing is certain about first-quarter results about to be released. They could not care less about current market valuations.

And while it’s a Wall Street cliché that “orientation is important,” this view is leading to absurd measures right now, when the S&P 500 is priced into profits that can hardly materialize in two. years. This is a level of faith in the future that history gives little basis to justify.

Here is the math. Based on existing earnings analysis forecasts for the entire 2021, the S&P 500 is quoted nearly 24 times in estimates, among its highest valuations in history. To reduce the multiple to the long-term average of 16 times annual profits, companies of the caliber will need to achieve about 15% more than capital researchers currently expect to earn, in 2023.

Is this possible? Yes. Using a projected growth rate compounded from 2019, it is within the approximate 6% expansion in revenue that S&P 500 companies have historically generated over time. But, are there strong reasons to suspect that someone has a compelling view of what will happen in a specific two-year period? This is more murky. Given how much this view is being based, investors would be advised to consider what the market is currently demanding.

“What we’re talking about in mathematical terms is really a psychological phenomenon,” said Lawrence Creatura, fund manager at PRSPCTV Capital LLC. “It is mathematically observed that there are more disadvantages in the market than in March 2020, although ironically it is sent exactly the opposite “.

In fact, investors are pouring one a record amount of new equity money this year amid hopes that vaccines and policy support will bring the economy back to normal. Its willingness to pay revenue has boosted the S&P 500’s P / E ratio almost 20% above its maximum during the last bullish market. It’s not that valuations are a good timing tool, but with so much optimism, the risk that these estimates won’t come true is more dramatic.

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Hypothetically speaking, if profits fail to recover and the market’s multiple return “returns to normal” (the long-term average of 16, the S&P 500 is in danger of losing a third of its value).

“Earnings are completely critical and that’s really what you need to focus on now,” said Jeff Mills, investment director at Bryn Mawr Trust. “If you don’t keep seeing how the basics are laid, you could see a dramatic repetition.”

Complicated things are the Covid-19 pandemic and the massive models of fiscal stimulus height on Wall Street. It doesn’t matter in 2023 – even getting control of this year’s results is difficult. Following analysts studying individual companies, S&P 500 profits will increase 26% to $ 174 per share this year. Ask top-down strategists who give forecasts by tracking macro indicators such as manufacturing and there is a wide range: from $ 152 to $ 202 per share.

Even reaching the top of the range of strategists would let the shares trade at more than 20 times the profits.

The huge gap is due, in part, to an environment where, a year after the pandemic, no one can confidently predict the enduring power of demand for staying at home, or the rise in consumer spending from of stimulus controls. The scope of the benefits affected by the supply chain disruptions and rising commodity costs are also big wildcards.

Banks like JPMorgan Chase & Co. and Citigroup Inc. will begin reporting next week. First-quarter earnings for S&P 500 companies are expected to increase 24%, the fastest since 2018, according to analysts compiled by Bloomberg Intelligence. At the forefront of the package are carmakers, retailers and banks, whose profits probably doubled from a year ago.

Not surprisingly, analysts record estimates of profits during the pandemic, although the fact that they have proven too conservative is a lot of stock markets. They underestimated U.S. corporate earnings power by an unprecedented 20% on average in the last three quarters of last year. During the five years prior to 2020, only 3% were missing.