Forwards earnings estimates for all S&P 500 companies combined have increased 11 of the last 12 weeks. Bottoming out the week of June 26th at $127.98, and increasing about 14.5% to $146.43 as of 9-18.
If we look at EPS growth rates for 2020 and 2021, we can also see estimates beginning to firm up for the first time in awhile. As of Friday, 2020 looks like an earnings decline of 19%, while 2021’s earnings growth rate is around 28%, and 14% for 2022.
Clearly the market has priced at least some of this in already. The forward PE was 18.9 to start the year, and stands at 22.7 as of Friday.
So with a 20% earnings decline and a 2% dividend rate, the change in valuation so far is +20%. And this follows 2019’s stock gains, which came almost entirely from an increase in valuation as well.
Clearly the market has priced in good news, and therefore these corrections (like the one we are in now) shouldn’t come as a surprise.
The S&P 500 hit the break even on year mark this morning (3230.78), which is still about 4.5% above its 200 day.
In my post on Friday, I mentioned how it felt like the market was looking to drop into the vicinity of its 200 day moving average. The forward earnings yield on the S&P 500 now stands at 4.41%, when compared against treasury yield of 0.69% (Equity risk premium chart above) and even the investment grade bond index, stocks still look reasonably attractive. Especially against the backdrop of 0% short term rates indefinitely.
Market corrections can and do occur for a variety of reasons. The short term reactions could be controlled by COVID and election outcomes. It’s hard to see a long lasting decline in light of the fundamentals. And the Fed’s policy is quite bullish in the macro sense. But 2020 has been anything but ordinary. Remaining cautiously optimistic for the next couple years, but its likely to be a very bumpy ride!