February 4, 2020
Coronavirus: The coronavirus will likely remain the dominate driver of equity markets until investors see a declining increase in the number of confirmed cases. That hasn’t happened yet, and using other outbreaks as a guide has an educated guess landing around the end of February. Bloomberg reported that Apple’s major suppliers in China plan to resume full production next Monday 2/10 and many other China-based companies plan to resume production next week with the balance expected to open mid-month. Yesterday’s gain in the SPX was, at least partly due to reports the China supply chain (especially electronics) may be more resilient than feared despite work stoppages and travel restrictions. Any updates that delays business resumption or reports suggesting insufficient inventories could easily swing the narrative to the downside.
Earnings inflection? We’re nearly halfway through S&P 500 Q4 earnings season with the blended earnings growth rate (actual results mixed with still-to-come consensus estimates) now standing at +0.14%. Consensus expectations coming into Q4 earnings season was for a decline of -2.0%. Nearly 71% of companies reporting have beat consensus EPS expectations compared to a 74% one-year average. Those companies beating consensus are doing so by a +4.5%, matching the one year average. Top down estimates for 2020 S&P 500 EPS of ~$175 were partially influenced by early Q4 expectations. For the past 6 weeks, we’ve been using a more optimistic estimate of $180. At present levels, that implies a current forward implied multiple of 18x, which isn’t necessarily expensive based on historical examples of large-scale monetary accommodation when multiples expanded beyond 19x.