Morning Notes — How it Works

The impact of the outbreak will leave a massive pothole in the US economy and S&P 500 earnings. A steep uncertainty discount has been applied…it’s a moving target of a moving target around infection rates and the negative economic impact of containment efforts. But there’s some good news…maybe. The infection rate in Italy has recently decelerated to ~13% over the past three days. The infection curves from other countries tend to materially decelerate below ~10%. If Italy’s infection rate can sustain a level below 10% for a few days, investors will begin to model the lifting of containment efforts. If the US and other countries experience Italy-like infection rates (let’s hope not), they can measure their curves to sub ~10% and begin to more definitively asses the economic impact. At the moment, we’ve baked in a 5% GDP contraction for the first half of 2020. Clearly a recession and the top-down application to S&P 500 2020 EPS suggests something around ~$150. The current 2020 consensus estimate is $167.5 but that will go lower in the weeks ahead. Will anyone care? Maybe not. By the time we get through the first half of the year, every buy-side investment manager, sell-side analyst and strategist will start applying 2021 estimates. Those will be all over the place, but you have to expect the year-over-year EPS growth rate will be in the mid-to-high teens given massive recent stimulus, pent up demand and depleted inventories. This would put 2021 SPX EPS back in the mid-$170 range with a 18x multiple to ~3200. Important…current market expectations of ‘massive stimulus’ already include a US fiscal stimulus bill in the $1T-$1.2T range…this needs to happen first.