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Difficulty: Easy
1) IMF: -3% World GDP growth for 2020, worst since Great Depression
2) US unemployment rate to hit around 20% (vs. 10% in 2008/09)
3) S&P 500 earnings forecasted to decline around 30% year-on-year
4) Yet analysts are keeping S&P 500 targets 3-18% above current levels
5) The InvestQuest would not buy stocks at this juncture
- Bottoms-up earnings estimates have not been sufficiently revised down
- A dearth of dividend payouts and share buybacks in 2020
- Global equity valuations are now expensive again
IMF predicts worst recession since Great Depression
IMF forecasts -3% World GDP growth for 2020. Earlier this week on Tuesday, IMF reported that we are likely heading into the worst recession since the Great Depression. IMF forecasts a fall in 2020 global GDP of 3% year-on-year, a downgrade of 6.3 percentage points from their earlier projection in January 2020, which is a major revision over a very short period of time.
In comparison, real GDP growth was -0.1% during the Global Financial Crisis, according to the IMF.
US employment situation looks dismal too
What is more tangible to the general populace is the state of employment. Since mid-March 2020, we have since seen more than 20 million US workers filing for unemployment, effectively wiping out a decade of job creation.
The employment situation is expected to worsen further with most major banks projecting US unemployment rates to hit ~20% (HSBC: 21% for 2Q, J.P. Morgan: 20% for 2Q, Goldman: 15% for 3Q). This view is also echoed by government officials. To put things in perspective, unemployment rates in the US “only” hit ~10% during the 2008 financial crisis.
“We are going to go through a couple of quarters, at least, where things will be bad…I could see a [jobless] number hovering around or slightly below 20 percent, even.”
Patrick Harker, president of the Federal Reserve Bank of Philadelphia
Spillover to S&P 500: Corporate earnings to decline ~30%
As one can imagine, the spillover to US corporate earnings is going to be immense. The S&P 500 Index generated earnings per share of approximately $165 in 2019.
For 2020, the most recent top down estimates are pointing to a earnings decline of approx 30% year-on-year, ie Goldman is looking at a 33% earnings decline to just $110 per share while HSBC is expecting a 28% earnings decline.
Yet analysts are keeping S&P 500 targets above current levels
What is propping up stock markets now is the anticipation of a sharp recovery in 2021, with supportive fiscal and monetary policies that have been coordinated and relatively preemptive in nature.
Analyst forecasts are still positive. For the reasons listed above, despite heading into the worst recession since the Great Depression, major banks are still keeping S&P 500 targets above current levels (after markets have already rallied 30% from the trough of 23 March). Individual bank forecasts as follows:
- Goldman Sachs: 3,000 (4% implied upside)
- J.P. Morgan: 3,400 (18% implied upside)
- HSBC: 2,950 (3% implied upside)
- Bank of America Merrill Lynch: Trading range floor of 2,350-2,450 and ceiling of 2,850-2,950
The InvestQuest’s View
The InvestQuest’s View: Personally, stocks markets seem a little too exuberant in the short-term. Bottoms up earnings estimates have not been sufficiently revised down, as I would assume most analysts are awaiting more clarify from company management during their 1Q earnings calls. A dearth of dividend payouts and share buybacks in 2020, forecasted by Goldman to decline by 23% and 50% respectively is also going to create further headwinds.
In addition, looking at the above forward P/E chart for global equities (which only includes inputs from analysts who have updated their earnings estimates within the last 20 days), sourced from a HSBC Equity Strategy article published on 14 April 2020, equity valuations are now pricing expensive again.
I would heed patience in entering the market at current levels.
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