Author Topic: Earnings & P/E ratios in 2020  (Read 1723 times)

Steeze

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Earnings & P/E ratios in 2020
« on: April 08, 2020, 12:19:47 PM »
Curious if anyone has any reliable information for earning forecasts over the next year.

The reason I ask is, if the market is down 25%, but projected earnings are also down 25% - is the market just priced at the exact same valuation it was two months ago? Is there even a reliable source for earnings forecasts right now? Curious if valuations are meaningfully lower now or if there is a reasonable possibility that they are even higher than they were.

Buffaloski Boris

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Re: Earnings & P/E ratios in 2020
« Reply #1 on: April 08, 2020, 02:15:18 PM »
Curious if anyone has any reliable information for earning forecasts over the next year.

The reason I ask is, if the market is down 25%, but projected earnings are also down 25% - is the market just priced at the exact same valuation it was two months ago? Is there even a reliable source for earnings forecasts right now? Curious if valuations are meaningfully lower now or if there is a reasonable possibility that they are even higher than they were.

They’re probably higher. As completely crazy as that seems. I saw an article the other night indicating that forward PEs for the SP500 were around 19 right now.

marty998

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Re: Earnings & P/E ratios in 2020
« Reply #2 on: April 09, 2020, 06:41:34 PM »
Curious if anyone has any reliable information for earning forecasts over the next year.

The reason I ask is, if the market is down 25%, but projected earnings are also down 25% - is the market just priced at the exact same valuation it was two months ago? Is there even a reliable source for earnings forecasts right now? Curious if valuations are meaningfully lower now or if there is a reasonable possibility that they are even higher than they were.

They’re probably higher. As completely crazy as that seems. I saw an article the other night indicating that forward PEs for the SP500 were around 19 right now.

Similar for the Australian market. Falls 30%, but forward P/E ratios have fallen from 18 to 15 based on the limited guidance put forward by most companies.

In the GFC they got down to 8.

js82

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Re: Earnings & P/E ratios in 2020
« Reply #3 on: April 09, 2020, 09:15:15 PM »
Curious if anyone has any reliable information for earning forecasts over the next year.

The reason I ask is, if the market is down 25%, but projected earnings are also down 25% - is the market just priced at the exact same valuation it was two months ago? Is there even a reliable source for earnings forecasts right now? Curious if valuations are meaningfully lower now or if there is a reasonable possibility that they are even higher than they were.

"Reliable"?  No.  But it's pretty safe to say that for companies whose demand is at all elastic or tied to discretionary purchases, that their earnings are going to be down WAY WAY WAY more than 25% for the next couple quarters.  Many won't be turning a profit at all.

People aren't taking airline flights.  They're not buying cars.  Takeout isn't making up for people not going to restaurants.  They might be buying some electronics, but not as many they would if they felt secure in their jobs.  They're consuming lots of digital media at home.  Apparently buying a lot of booze too.

"conventional wisdom" for 2020 is that staples/essentials(food/healthcare/etc.) will do okay to well, discretionary purchases will do terribly in most cases(but places like Amazon might do okay by picking up the pieces left behind by brick-and-mortar stores).  The fortunes of REITs and the like are tied to whichever sectors they're servicing.

Earnings in many sectors will be terrible(in many cases negative) for 2-4 quarters.  Past that it's not unreasonable to expect a return to normalcy for most well-run companies.

MustacheAndaHalf

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Re: Earnings & P/E ratios in 2020
« Reply #4 on: April 10, 2020, 02:43:48 AM »
Goldman Sachs has invested in a system to track COVID-19 data, so their information should be better than average if they picked quality sources of data.
https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed-by-record-rebound.html

From that article, Goldman projects a terrible 2020 Q2, followed by a spectacular 2020 Q3.  From that I assume they believe COVID-19's earnings impact is limited to April/May/June based on currently available information.

js82

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Re: Earnings & P/E ratios in 2020
« Reply #5 on: April 10, 2020, 07:36:49 AM »
Goldman Sachs has invested in a system to track COVID-19 data, so their information should be better than average if they picked quality sources of data.
https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed-by-record-rebound.html

From that article, Goldman projects a terrible 2020 Q2, followed by a spectacular 2020 Q3.  From that I assume they believe COVID-19's earnings impact is limited to April/May/June based on currently available information.

Goldman's numbers for GDP are reasonable, but earnings are still going to suck, even given the "spectacular Q3".  Remember, they're predicting -34% in Q2 followed by +19% in Q3.  That still leaves us ~15% below where we were in terms of GDP - and -15% in revenues(loosely speaking) means a lot more than -15% in earnings, since it's highly unlikely that costs scaled linearly downwards with the drop in sales.  There are a lot of companies in this country that can't turn a profit with -15% to revenue.

Anyone that thinks we can just flip the "on" switch here is kidding themselves - the reopening will have to be gradual and measured for public health reasons(that doesn't mean it won't still be sizeable from a GDP perspective).  And supply chains don't restart with a snap of the fingers - the US and Europe are going to be recovering from this for a while.  Remember - The recovery, as strong as Goldman predicts it will be, still only has us recovering a little over half of what we're going to lose in Q2, by the end of Q3.

That said, most of this is priced into the market already.  But anyone looking for a return to anywhere near normal for earnings numbers in Q3(and quite possibly, in Q4) is likely to be disappointed.  It's going to be 2021 before we return to something "normal-ish".
« Last Edit: April 10, 2020, 07:38:50 AM by js82 »

Buffaloski Boris

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Re: Earnings & P/E ratios in 2020
« Reply #6 on: April 10, 2020, 08:47:41 AM »
Goldman Sachs has invested in a system to track COVID-19 data, so their information should be better than average if they picked quality sources of data.
https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed-by-record-rebound.html

From that article, Goldman projects a terrible 2020 Q2, followed by a spectacular 2020 Q3.  From that I assume they believe COVID-19's earnings impact is limited to April/May/June based on currently available information.

I think Goldman got it half right.  A really wretched 2nd quarter looms. The recovery on the other hand?  I'm skeptical given that this is a consumer driven economy with what, maybe 1/3 of folks being put out of work?  Even with increased unemployment checks and the stimulus checks, I don't see this as some sort of "flip the light switch" sort of recovery. I don't believe that "Mustachianism" is going to hold for the majority for the very long term, but I also don't think that we're going to see consumption return to 2019 levels for quite some time. There is also a disproportionate impact on smaller businesses that I think is going to be more or less permanent. And they're the employers. The economy is about human behavior and human behavior has been shocked out of it's previous patterns.  It's going to have a lasting impact. 

The stock markets on the other hand I believe are reacting heavily to the Fed actions.  Lots of dollars chasing not much in the way of investment returns.

magnet18

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Re: Earnings & P/E ratios in 2020
« Reply #7 on: April 10, 2020, 10:16:10 AM »


 There is also a disproportionate impact on smaller businesses that I think is going to be more or less permanent. And they're the employers. The economy is about human behavior and human behavior has been shocked out of it's previous patterns.  It's going to have a lasting impact. 


What permanent impact do you expect?

I'm sure unfortunately many small business will go under, but that was also the case for many major crashes and the impacts of those certainly weren't permanent


Regarding the lasting impact to behavior patterns - how long is lasting? - IMO the raging desire for overconsumption beyond your means is a pretty fundamental human trait (those here being the exception, not the rule), and it's currently stifled, but I'm guessing a year from now the average American will once again be blindly consuming with full force.


Eta
I agree with the rest of your statement.  Recovery certainly won't be a light switch.  I just also don't see the permanent aspect
« Last Edit: April 10, 2020, 11:01:33 AM by magnet18 »

Steeze

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Re: Earnings & P/E ratios in 2020
« Reply #8 on: April 10, 2020, 10:58:36 AM »
Maybe spending will rocket past 2019 levels as people reflect on the virus and embrace a YOLO attitude. You might die from a virus tomorrow, might as well spend it! On credit!

waltworks

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Re: Earnings & P/E ratios in 2020
« Reply #9 on: April 10, 2020, 01:09:45 PM »
If you think this is the beginning of the end for humanity, sell everything and buy guns/gold/farmland.

If you think this will suck, but life will continue on, keep doing whatever you were already (presumably buying stocks) you were doing before.

-W

Buffaloski Boris

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Re: Earnings & P/E ratios in 2020
« Reply #10 on: April 10, 2020, 03:00:56 PM »


 There is also a disproportionate impact on smaller businesses that I think is going to be more or less permanent. And they're the employers. The economy is about human behavior and human behavior has been shocked out of it's previous patterns.  It's going to have a lasting impact. 


What permanent impact do you expect?

I'm sure unfortunately many small business will go under, but that was also the case for many major crashes and the impacts of those certainly weren't permanent


Regarding the lasting impact to behavior patterns - how long is lasting? - IMO the raging desire for overconsumption beyond your means is a pretty fundamental human trait (those here being the exception, not the rule), and it's currently stifled, but I'm guessing a year from now the average American will once again be blindly consuming with full force.


Eta
I agree with the rest of your statement.  Recovery certainly won't be a light switch.  I just also don't see the permanent aspect

One of the things that I find worrisome and perhaps lasting/ permanent is the impact on entrepreneurs. We ran into that after the GFC, and in my view it was one of the reasons why the recovery took so long.  Entrepreneurs just wouldn't open businesses. It did change but it took time.  Now that we're likely to cull a huge number of them as an "acceptable" sacrifice for COVID, I wonder how many are really going to be both willing and able to dust themselves off and give it another go?  That they do so is fairly critical for our economy. The further "Amazoning" of our economy is likely to be an end result of this.   

As for consumer behavior, I do think the trend long term will be mostly back to the old ways of the consuma sucka.  The limiting factor there will be ability.  Unemployed isn't going to get you much money or credit.  And I do think that as with the great depression, some behaviors will carry on. Frugality just became cool. 
 

vand

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Re: Earnings & P/E ratios in 2020
« Reply #11 on: April 11, 2020, 02:48:19 AM »
A trailing P/E of 19 is rich, but it is not out of the band of possibility for a cyclical bear market bottom. 

Historic PEs are less and less meaningful the further back you go, and the bad news for people still waiting is that the historic PE has been climbing steadily over time.  We can all hypothesize why that is (I had a stab here https://forum.mrmoneymustache.com/investor-alley/thoughts-on-indexing/), but the long term trend is very clear, and you should never argue with the trend.

I would also caution not to place too much emphasis on PEs right now. We are in uncharted territories, it is not unreasonable therefore to suggest that we will see thing play out in ways that have not been seen before.

The very low PEs we have seen quoted are indicative of secular bear market bottoms, but we are NOT in a secular bear. Big difference. This is what most people, even most people well educated in market history, still do not understand - there are bear markets, and there are BEAR markets. This is just a bear market.

Buffaloski Boris

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Re: Earnings & P/E ratios in 2020
« Reply #12 on: April 11, 2020, 07:39:04 AM »
A trailing P/E of 19 is rich, but it is not out of the band of possibility for a cyclical bear market bottom. 

Historic PEs are less and less meaningful the further back you go, and the bad news for people still waiting is that the historic PE has been climbing steadily over time.  We can all hypothesize why that is (I had a stab here https://forum.mrmoneymustache.com/investor-alley/thoughts-on-indexing/), but the long term trend is very clear, and you should never argue with the trend.

I would also caution not to place too much emphasis on PEs right now. We are in uncharted territories, it is not unreasonable therefore to suggest that we will see thing play out in ways that have not been seen before.

The very low PEs we have seen quoted are indicative of secular bear market bottoms, but we are NOT in a secular bear. Big difference. This is what most people, even most people well educated in market history, still do not understand - there are bear markets, and there are BEAR markets. This is just a bear market.

I think you're right on the PE ratio trend. It has gone higher.  I do think 19 is very rich indeed.  Probably too rich for me.  Everybody has their own risk/reward tolerance; I'm not seeing the potential reward as being worth the risk. 

Please knock some holes in my logic.  What we're in effect saying is that a trailing PE based on earnings BEFORE COVID merit a price that is overall 19 times those earnings before COVID, without really considering the very likely horrible impact on earnings going forward. 

The US in particular is a consumer based economy.  20%+ of those consumers are now out of work without the level of economic protections that other countries provide their workers.  Other workers who are still employed have received significant pay clawbacks.  I find it doubtful that we're going to flip a switch and all of those jobs are going to come back and we move on like it's 2019.

Further, I'm not so sure this sort of analysis even matters for the equities markets in a scenario where central banks are pumping trillions upon trillions into the economy. It's like we're discussing the nuances of an orchestra's rendition of Mozart while a 500 lb gorilla is pounding out "chopsticks" on a piano in the concert hall.

ETA: your tagline is proving prescient. 
« Last Edit: April 11, 2020, 08:15:05 AM by Buffaloski Boris »

bwall

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Re: Earnings & P/E ratios in 2020
« Reply #13 on: April 11, 2020, 09:29:40 AM »
Please knock some holes in my logic. 

I'd love to find some holes in your logic, but I can't. Admittedly, I'm bearish so I'm looking for the best bull case I can find so that i can compare arguments.

I've always been a long term bull and still am. But, I can't get over my current short term bearish bias.

MustacheAndaHalf

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Re: Earnings & P/E ratios in 2020
« Reply #14 on: April 11, 2020, 11:29:43 PM »
The US in particular is a consumer based economy.  20%+ of those consumers are now out of work without the level of economic protections that other countries provide their workers.  Other workers who are still employed have received significant pay clawbacks.  I find it doubtful that we're going to flip a switch and all of those jobs are going to come back and we move on like it's 2019.
It probably isn't like flipping a switch, but current conditions are probably better than you expect.  I think the CARES Act aims to cover expenses for both Americans and Health Care providers ("shall provide coverage, and shall not impose any cost-sharing").
https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-id96701EA74B9D46EE82E0ED83DD1ED18F
The $600 checks going out to many Americans should also help with rent and food.

ChpBstrd

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Re: Earnings & P/E ratios in 2020
« Reply #15 on: April 12, 2020, 09:02:55 PM »
1)
No. 100% of forecasts are wild guesses right now. In the US, there are still over 30,000 new infections most days, and those are just the half of people with symptoms and who decide to get tested. The cumulative infections chart retains an unbroken upward trend, and the daily increase in cumulative infections is a mixed bag, but around 30k/day.

https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html

If actual infections (tested + untested) are closer to 60k per day, how good is that really? What does that look like for the economy in 30 days?

2)
Economic activity has a multiplier effect. When more people have jobs, they spend more money, which creates the need for more jobs and business investment, which in turn create more spending. Likewise, when unemployment suddenly goes up, consumer spending and business investment spending drops, which creates the need for more layoffs, which in turn reduces spending. This is why the economy is cyclical.

It is also why we can't say something like "aggregate payrolls dropped 20% so aggregate corporate revenues are expected to drop 20%". Actually, corporate revenues would drop more than that because people would become wary of financing fancy cars and houses, eating at restaurants every night, remodeling the bathroom, and buying marginally useful shite off of Amazon. Plus, financial institutions would cut off credit to many people who miss payments due to unemployment or bankruptcy. In a recession, businesses often have to cut prices to attract customers in an attempt to outlive their competitors, who are also losing money. Meanwhile, lower interest rates may have the effect of encouraging money hoarding and frugality among retirees.

effigy98

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Re: Earnings & P/E ratios in 2020
« Reply #16 on: April 29, 2020, 05:56:10 PM »
Earnings don't matter. Tax payers will forceably be bailing out zombie companies for years to come. More important how politically connected they are.
« Last Edit: April 29, 2020, 05:57:56 PM by effigy98 »

Buffaloski Boris

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Re: Earnings & P/E ratios in 2020
« Reply #17 on: April 29, 2020, 06:15:56 PM »
Earnings don't matter. Tax payers will forceably be bailing out zombie companies for years to come. More important how politically connected they are.
No argument. How you successfully invest in that scenario is a bit of a mystery to me.

Steeze

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Re: Earnings & P/E ratios in 2020
« Reply #18 on: May 01, 2020, 06:15:23 AM »
Earnings don't matter. Tax payers will forceably be bailing out zombie companies for years to come. More important how politically connected they are.
No argument. How you successfully invest in that scenario is a bit of a mystery to me.

I'm guessing - Big Banks, Big Oil, The War Machine, Big Tech, Big Pharma. These companies should make up a good % of political contributions in the US.

Citi, Goldman, Wells Fargo, JP Morgan, Bank of America, Exxon, Chevron, Lockheed, Boeing, Raytheon, Google, Facebook, Amazon, Comcast, AT&T, Anthem, Bayer, United Health Care.

ctuser1

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Re: Earnings & P/E ratios in 2020
« Reply #19 on: May 01, 2020, 06:58:54 AM »
Earnings don't matter. Tax payers will forceably be bailing out zombie companies for years to come. More important how politically connected they are.
No argument. How you successfully invest in that scenario is a bit of a mystery to me.

I'm guessing - Big Banks, Big Oil, The War Machine, Big Tech, Big Pharma. These companies should make up a good % of political contributions in the US.

Citi, Goldman, Wells Fargo, JP Morgan, Bank of America, Exxon, Chevron, Lockheed, Boeing, Raytheon, Google, Facebook, Amazon, Comcast, AT&T, Anthem, Bayer, United Health Care.

https://www.statista.com/statistics/257364/top-lobbying-industries-in-the-us/

Pharma and healthcare are at the top - since they are angling for the most advantageous positions in the eventual healthcare move towards single payer.

I am not convinced investing based on lobbying expenses is a good idea. Redistribution of money (which is what lobbying mainly aim to achieve - to take from the 99% and give to 1%) is a linear exercise. Innovation has historically been an exponential driver. US Stock market has been driven by innovation - not redistribution. Redistribution since the Reagan era played a big role in disenfranchising the 99%, but the 99% aren't the marginal drivers of the stock market and hasn't quite mattered in the US economic setup since the 80's.