Morning Notes — CQ2 Earnings Season and Valuation

Markets are always looking 6-9 months into the future and the direction of growth matters more than the magnitude. Based on May data, we can confidently say the US economy is growing, a business cycle has started and the 2020 recession was the shortest one on record. Yes, the recovery could also turn out to be the shortest or most feeble, but absent an exogenous shock, there’s seems to more than enough stimulus to take the other side. Back in late March, it was clear that the Fed had fundamentally altered liquidity conditions to the extent where an historic equity valuation framework was no longer useful. And the factors that influence multiples (cost of capital and equity risk premium) were and are the most supportive in history. Using the consensus 12-month SPX EPS of $162 gets you a current implied multiple of 19x. But if Q2 earnings season (starts mid-July) simply meets expectations, you’re likely to see the forward multiple expand into the low 20s.