May 1, 2020
The S&P 500 continues to mostly track the US new case curve. US new case counts are well off their apex from early April, but unable to inflect meaningfully lower as increased testing capacity leads to more discovery. The avalanche of policy stimulus since late March, peak in new cases since early April and plans to reopen the US economy has got us this far, but the pace of economic normalization will likely be the focus going forward. Investors are now using the 2021 consensus SPX EPS estimate of ~$165 as their guide, which is ~30% higher than the current 2020 EPS estimate of ~$134. In mid-January, the consensus SPX 2020 EPS estimate was comfortably at ~$184, suggesting a two year earnings contraction of ~10%. Whether they know it or not, investors will be measuring the pace of normalization against the expectation for a 10% earnings decline over two years. Based on a very low discount rate, investors will also be assigning a higher than average multiple to the 2021 earnings…maybe something as high as ~20-22x given the right catalyst.