Uddrag fra FT Alphaville:
This problem of measuring valuation as earnings appear to be just about to collapse – but when bottom-up consensus has not yet been revised down – has historically always been the case when economies are entering a recession. As an example, the market troughed in March 2009 but FY1 EPS [earnings-per-share] (2009) based on bottom-up consensus still fell another 23 per cent after this point.
And it’s not even clear whether we’ve had the bottom now in equities.
History, however, provides some insight as to where valuations might fall to if, of course, you assume current estimates are correct. Goldman again:
Instead of relying on bottom-up consensus – which tends to move slowly and is often a month or two behind market pricing – we can look at valuation ratios historically, assuming market participants had perfect foresight of the actual outcomes for EPS.
The squid are forecasting a 45 per cent earnings collapse in 2020 for the Stoxx 600. That’s the bad news. The badder news? That means the 12-month forward multiple for this wide-ranging group of European companies, which covers 17 countries, is more than double what it is was during the trough of the financial crisis, and the Eurozone crisis:
Yep, that’s 23.4 times forward earnings, versus 9.3 and 9.5 during the previous two lows. So either European stocks still have a long, long way to fall or Goldman’s estimates are too pessimistic. Or a mix of both.
The other alternative is that the current sectoral mix of the Stoxx 600 means that it’s hard to compare crisis-to-crisis. Goldman, to its credit, is aware of this, noting that banks were two-times the size of healthcare in the index in 2007 and now, it’s the other way around. Healthcare, of course, is far less cyclical and, particularly in low-interest rate environments, carries higher margins versus banks, which should help to keep earnings, and therefore multiples elevated. So the earnings crunch might not be quite as brutal this time.
Goldman’s work just goes to show how difficult it is getting a handle on this recession, and its effect on corporates profits. Despite the equity markets recent spout of enthusiasm, it’s still difficult to believe that anyone really knows how fast the economy will recover and, in particular, how it will be re-organised when we’re finally released from our abodes.
