Americas CIO View

Cutting to Crisis Forecasts: 2020E S&P 500 EPS 125 dollars

An economic crisis of uncertain severity: cut S&P 500 2020 end target to 2750

We expect a state of emergency in the United States and most of Europe for the next 60 days. Emergency conditions in most major U.S. cities and metropolitan areas are similar to what is now in effect in California and New York State as of late last week. Unprecedented curtailments on flights and long-distance travel, closed schools and universities, closed non-essential business workplaces, bans on large gathering and events, most restaurants and entertainment venues closed, etc. It is such lockdown conditions for an extended period across major U.S. and European cities, followed by many months of residual-demand and supply-side damage from late 2019 activity levels that are the basis of our newest 2020E (estimated) S&P 500 earnings per share (EPS) of 125 dollars and 2020 end S&P 500 target of 2750. We still think the S&P 500 has high potential to reach or exceed 3000 in the spring of 2021.

2020E S&P 500 EPS cut to 125 dollars, from 150 dollars a week ago, 172 dollars a month ago

The rapid spread of coronavirus in Europe and the United States after first hitting China has launched massive and unprecedented containment and prevention initiatives by governments and other institutions around the world: a prioritization of prevention over production. These restrictions are spreading to more regions, are stricter, and are now likely to last longer than we thought likely just a week ago. We now expect the deepest post-war U.S. recession, compressed into the shortest amount of time. Growth from the bottom should be strong, but it likely takes more than a year to recover to 2019 gross domestic product (GDP) and S&P 500 EPS. Thus, we slash 2020E S&P 500 EPS to 125 dollars, the third cut this year, to economic crisis forecasts. We cut 2021E S&P 500 EPS to 160 dollars from 170 dollars (which implies 150 dollars normal 2020E S&P 500 EPS). Inside are our annual S&P 500 EPS estimates for state of emergency duration scenarios of 30, 60, or 90+ days. We apply +/- 10 dollar bands on annual estimates given extreme uncertainties at some S&P 500 firms.

First and second quarter S&P 500 EPS excluding negatives will be a useful continuing indicator

The continuing earnings power of the S&P 500 will be masked by enormous losses at certain companies/ industries in the first couple of quarters of 2020. Some of these hard hit firms will likely need to restructure ownership in capital raises or government programs. But losses cannot be perpetual and thus obscure profits elsewhere in aggregate index or sector earnings. Our 125 dollars 2020E S&P 500 EPS, assumes the worst profit decline by far ever suffered by the consumer discretionary sector, ex. auto, of down 60% in full year 2020 and the energy sector down 85-90%. Our forecasts for other sectors are declines consistent with past big recessions. The exceptions are tech, down 15%, usually twice that, and financials down 25%, which fell 65% in 2009 vs. 2007. In the fourth quarter of 2008, S&P 500 EPS fell nearly 70% year-over-year, but down just 20% ex. financials. Our 2020E quarterly S&P 500 EPS are: 28 dollars (-30%) + 25 dollars (-40%) + 34 dollars (-20%) + 38 dollars (-10%) = 125 dollars.

Stimulus will likely be commensurate with the crisis, but it is never a net positive

Government emergency services, federal fiscal and monetary stimulus are expected to be huge. Fiscal packages of roughly two trillion dollars or 10% of GDP and U.S. Federal Reserve (Fed) balance-sheet expansion from four to over five trillion dollars are very likely. Fiscal stimulus will consist of spending/ grants and also business and household liability supports. The latter helps reduce further aftershocks to the economy, but does not boost current GDP. Fed asset purchases aim to provide liquidity and fund a deficit likely to go from about one to well over two trillion dollars in the coming year; not to further lower Treasury yields. Equity valuations on recovery earnings will be influenced by yields on fixed income.

The bear has come and mauled the laggards: no rotation to value

We raise consumer staples and utilities to overweight, joining tech/comm. and healthcare. We increase underweights at consumer discretionary and industrials. There is no rotation to cyclical value sectors yet and we think it is too early for such.

The S&P 500 closed at 2305 last Friday, making the third consecutive week of new lows and falling in four of the past five weeks. It was the fastest all time high to bear market decline on record with the S&P 500 now down 32% from its peak.

Different type of recovery: finding a safe return to work will be priority soon

Activities like air travel, large events and conferences are a long way from returning to normal. Schools and other highly social environments will prioritize prevention into the summer. However, we think many businesses and employees will seek safe ways to return to work in May. Necessity is the mother of invention, ways will be found and the innovators rewarded. A 4th of July celebration like no other is coming.

Appendix: Performance over the past 5 years (12-month periods)

 

02/15 - 02/16

02/16 - 02/17

02/17 - 02/18

02/18 - 02/19

02/19 - 02/20

S&P 500

-6.2%

25.0%

17.1%

4.7%

8.2%

Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 3/23/20

 

font

CIO View

This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

Other country

Other country

Disclaimer

THE CONTENT PRESENTED HERE IS INTENDED ONLY FOR PROFESSIONAL INVESTORS, E.G. BANKS, INVESTMENT ADVISORS, PENSION FUNDS, INVESTMENT FUNDS, INSURANCE COMPANIES AND SIMILAR LEGAL ENTITIES AND IS NOT INTENDED FOR PRIVATE INVESTORS. BY AGREEING TO THESE TERMS AND CONDITIONS, THE USER CONFIRMS AND ACKNOWLEDGES THAT HE IS ACTING IN HIS CAPACITY AS A PROFESSIONAL INVESTOR OR REPRESENTING A PROFESSIONAL INVESTOR AND IS NOT ACTING AS A PRIVATE INVESTOR.

© 2020 DWS Investment GmbH