Morning Notes — Balance of Risks

Next week marks the peak of CQ1 earnings season but SPX EPS estimates are now fairly well established with top-down 2020 EPS at ~$137 and 2021 at ~$167. Most investors are dismissing 2020 and looking into 2021. This normally happens around the middle of the year and accelerating this by a few months seems rational given present circumstances. If you trust a ~$167 EPS estimate, current levels imply a ~16.8x forward multiple, which is just above the 20-year average of ~16.2x. But given 10-year bond yields of 0.60% and unprecedented fiscal policy support, an average forward multiple seems far too conservative. The potential for multiple expansion, light equity positioning and extreme bearish sentiment keeps the balance of risks aimed higher. But the S&P 500 is near-term overbought following a +16% two week advance and a period of consolidation is normal. Overbought and oversold are measurements of price and time. Markets often move between these two conditions on nothing more than the passage of time…2-3 weeks.