Stocks & Unemployment: EPS ↓30%, Prices ↑43%

“It’s a recession when your neighbor loses their job; it’s a depression when it is you.”

What could possibly go right? For equity investors, everything turned out rosier than expected. From the March 23 low, the S&P 500 has risen 43%, while the employment rate has fallen from 96.4% to 86.7%, with 15 million networkers losing their jobs through May per #covid19.

The early forecasted headlines for an economic turnaround have been systemically dire. Most economists, illuminaries, and the newswire were calling for a severe recession at best, and a protracted world-changing depression at worst. Stocks, on the other hand, have been telling a far more optimistic story.

In a nutshell, the S&P 500 operating earnings (EPS) are forecast to fall from $157.12 in 2019 to $109.71 in 2020, a 30% decline. If this proves to be the case, the index is currently trading at 29x PE (projected year-end earnings), considerably higher than its 18x average since 1988. The upside in equities stems from a meteoric rise in estimated earnings from current levels to $161.80 by December 2021; in that case, stocks are trading at 19x their forward earnings estimates. As a professional money manager, how would I play this hand in an election year? I wouldn’t bluff.

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