Next years S&P earnings around 200, with a 13x multiple at a bear market panic sell off bottom would put us at 2600. 15x at 3000
Pretty realistic if the recession gets bad.
Current estimates for the S&P predict earnings growth even though there’s a very clear recession on the horizon, likely deep.
Anyway, lots of cheap stocks out there now if you avoid the index. Still too many absurdly overvalued constituents like Chipotle and Costco (40-50x trailing PE, just why)
My biggest concern is, while I agree with you that S&P 2023 EPS TTM could end up being $200, because we have not yet seen this reflected in estimates (Yardeni earnings forecasts shows $235 as an estimate), we have more room to fall before the expectation (let alone the reality) of that is priced in.
$235 Yarendi expectation -> $200 your expectation is a 15% difference. That means analysts (and consequentially the market pricing in those analysts expectations) are "incorrectly" estimating earnings 15% higher than they might be in your opinion.
Analysts predicted ~10% earnings growth in 2008 and it turned out to be -70%
Analysts by and large just extrapolate the trend. If there’s a severe recession, actual earnings could be 190 or even less.
That being said, buying around 3500 or below seems a decent value long term. But I don’t think this is a market where you should wait, instead pick individual companies that are already too cheap and hold them.
I bought a bunch of REITs with 6-8x ffo multiples, low debt, and double digit growth rates. Why bother with the 20x+ PE companies?
There are also many small cap growth companies at 1-2x sales and 30%+ growth rates. Why buy one at 10x sales?
IG bonds yielding 8% close to risk free?
You’d think this would all be obvious, yet major imbalances in valuations exist and is there for the taking.
You don't think companies have grown at all/become more profitable from 2019 -> 2022?
Wrong angle.
The profits that companies make in 2025 were compared against 0% interest rate. We are now looking at a 4.5% interest rate environment.
So a company that offered 0% profits in 2023, 0% profits in 2024, and 10% profits in 2025 (ie: geometric average 3.2% profits each year from 2023 through 2025) now *loses* money to a savings account that's now expected to earn 4.5% through 2023, 2024, and 2025.
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Companies that offer very little profits with "promise of future profits" are now losing out to savings accounts and other safe investments. Its not that the company has changed, its that savings accounts / safe investments / bonds have changed.
Furthermore, if that company was relying upon debt to generate that profit, their cost has gone from near 0% on that debt, to -4% per year. So they're not looking at 0% profits in 2023, but closer to -4% profits in 2023, -4% profits in 2024, and 6% profits in 2025.
Obviously, this hypothetical depends on how much debt and how much "future profits" a company is expected to have. But growth/tech companies are well known for borrowing tons of money and promising future growth.
Stock price is not an objective measurement of whether companies grow or become profitable. Part of the price is determined by investor emotions. This is why the price to earnings ratio that investors are willing to put up with fluctuates.
Part of the price is determined by investor emotions.
how many investors actively manage their portfolios and do so with their emotions (despite statistical evidence saying you should do neither if you want the best returns)? enough to actually move the markets?
what does that look like in a more zoomed in view? 1,000,000 americans logging in every day/week/month/quarter and rebalancing their 401k/IRA/brokerage accounts? realizing losses by selling?
The way I understand it current price of the stock is set by active investors. Passive investors have no influence on the price. If I tell my 401 (k) to put in 5% of my salary to the S&P 500 every paycheck, I have not shown a preference as to whether the S& p 500 should be set at 3,719 (as it is today) or 3,000, or zero.
But if you object to the term "emotion" when describing active investors then let's just say that the stock price is often set by changes in the price to earnings multiple, which usually has nothing to do with the actual value of a company and is inexplicable outside hand wavy appeals to social psychology.
fear of projected/expected/hypothetical economic conditions though, so they are kind of related?
like i totally agree, i can understand the basic math between
"equities are worth more when corporations can finance their projects/growth cheaper (0-2%) than at 4-6%"
the less money corporations stand to make, the less profitable they are, they less they are worth, the less premium investors want to pay for exposure to their hypothetical earnings yields, etc. etc.
but some stat somewhere said "it's not as simple as exiting the market and waiting for the fed to do QE again" (don't fight the fed)
equities can still "price in", digest, and "go up" during fed monetary policy tightening cycle. i think i read it's happened 9 out of 14 times previously. not sure the truth behind it/wish i could remember the source.
Comments
How much more pain do you think the S&P500 is in for over the next 12-24 months given the current "macro" landscape?
If tech companies miss earnings again when they report for Q4, do they have another 10-20% drop left in them again?
Next years S&P earnings around 200, with a 13x multiple at a bear market panic sell off bottom would put us at 2600. 15x at 3000
Pretty realistic if the recession gets bad.
Current estimates for the S&P predict earnings growth even though there’s a very clear recession on the horizon, likely deep.
Anyway, lots of cheap stocks out there now if you avoid the index. Still too many absurdly overvalued constituents like Chipotle and Costco (40-50x trailing PE, just why)
My biggest concern is, while I agree with you that S&P 2023 EPS TTM could end up being $200, because we have not yet seen this reflected in estimates (Yardeni earnings forecasts shows $235 as an estimate), we have more room to fall before the expectation (let alone the reality) of that is priced in.
$235 Yarendi expectation -> $200 your expectation is a 15% difference. That means analysts (and consequentially the market pricing in those analysts expectations) are "incorrectly" estimating earnings 15% higher than they might be in your opinion.
Scary times.
Analysts predicted ~10% earnings growth in 2008 and it turned out to be -70%
Analysts by and large just extrapolate the trend. If there’s a severe recession, actual earnings could be 190 or even less.
That being said, buying around 3500 or below seems a decent value long term. But I don’t think this is a market where you should wait, instead pick individual companies that are already too cheap and hold them.
I bought a bunch of REITs with 6-8x ffo multiples, low debt, and double digit growth rates. Why bother with the 20x+ PE companies?
There are also many small cap growth companies at 1-2x sales and 30%+ growth rates. Why buy one at 10x sales?
IG bonds yielding 8% close to risk free?
You’d think this would all be obvious, yet major imbalances in valuations exist and is there for the taking.
we dropped 20% just on interest rates.
i'm counting for at least another 20% across the board when earnings miss everywhere.
S&P500 3700 (current levels) * 0.8 (another 20% drop) = 2960
Interesting prediction.
so like q1/q2 2019? wouldn't be surprised I guess.
You don't think companies have grown at all/become more profitable from 2019 -> 2022?
Wrong angle.
The profits that companies make in 2025 were compared against 0% interest rate. We are now looking at a 4.5% interest rate environment.
So a company that offered 0% profits in 2023, 0% profits in 2024, and 10% profits in 2025 (ie: geometric average 3.2% profits each year from 2023 through 2025) now *loses* money to a savings account that's now expected to earn 4.5% through 2023, 2024, and 2025.
--------
Companies that offer very little profits with "promise of future profits" are now losing out to savings accounts and other safe investments. Its not that the company has changed, its that savings accounts / safe investments / bonds have changed.
Furthermore, if that company was relying upon debt to generate that profit, their cost has gone from near 0% on that debt, to -4% per year. So they're not looking at 0% profits in 2023, but closer to -4% profits in 2023, -4% profits in 2024, and 6% profits in 2025.
Obviously, this hypothetical depends on how much debt and how much "future profits" a company is expected to have. But growth/tech companies are well known for borrowing tons of money and promising future growth.
Correct. All investments need to be compared to the “risk free” alternative.
Stock price is not an objective measurement of whether companies grow or become profitable. Part of the price is determined by investor emotions. This is why the price to earnings ratio that investors are willing to put up with fluctuates.
how many investors actively manage their portfolios and do so with their emotions (despite statistical evidence saying you should do neither if you want the best returns)? enough to actually move the markets?
what does that look like in a more zoomed in view? 1,000,000 americans logging in every day/week/month/quarter and rebalancing their 401k/IRA/brokerage accounts? realizing losses by selling?
The way I understand it current price of the stock is set by active investors. Passive investors have no influence on the price. If I tell my 401 (k) to put in 5% of my salary to the S&P 500 every paycheck, I have not shown a preference as to whether the S& p 500 should be set at 3,719 (as it is today) or 3,000, or zero.
But if you object to the term "emotion" when describing active investors then let's just say that the stock price is often set by changes in the price to earnings multiple, which usually has nothing to do with the actual value of a company and is inexplicable outside hand wavy appeals to social psychology.
What's the ratio of active investors vs passive investors?
How many "total investors" are there making trades in the average month?
Even passive investors can panic sell when they see their 401k balance shrinking fast.
They really aren't being passive at that point, are they? They've become an active investor due to panic.
Maybe not if we're using a strict definition, so I'll add some words to what I said before:
Even passive investors can turn into active intestors and panic sell when they see their 401k balance shrinking fast.
Here's an example of someone trying hard to stay passive during the 2008 downturn: https://www.bogleheads.org/forum/viewtopic.php?t=25126
Interesting link. I see the poster is still active (and likely relatively wealthy) today at age 88. Good for him.
i don't think the low point is at all correlated to actual economic conditions. just fear
fear of projected/expected/hypothetical economic conditions though, so they are kind of related?
like i totally agree, i can understand the basic math between
"equities are worth more when corporations can finance their projects/growth cheaper (0-2%) than at 4-6%"
the less money corporations stand to make, the less profitable they are, they less they are worth, the less premium investors want to pay for exposure to their hypothetical earnings yields, etc. etc.
but some stat somewhere said "it's not as simple as exiting the market and waiting for the fed to do QE again" (don't fight the fed)
equities can still "price in", digest, and "go up" during fed monetary policy tightening cycle. i think i read it's happened 9 out of 14 times previously. not sure the truth behind it/wish i could remember the source.