Andrew Lapthorne, the global head of quantitative research at Societe
Generale, is skeptical of forecasts for a “perfect” v-shaped recovery in
corporate earnings. The consensus forecast among analysts is that by
the end of 2021, profits will be growing at nearly the same rate as they
were in late-2019.Lapthorne considered the unique nature of this crisis
and concluded that the consensus is too optimistic.Click here for more
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Wall Street's expectations for recovery from the coronavirus crisis
seems too good to be true. That's according to Andrew Lapthorne, the
global head of quantitative research at Societe Generale. He is
skeptical that the stock market's strong rebound from its trough in
March matches up with the reality that will unfold in the months ahead.
In particular, Lapthorne is skeptical of the “perfect” recovery that is
reflected in real-time consensus forecasts for earnings, the biggest
long-term driver of stock prices. Data he compiled shows that analysts
expect global profits to fall by 21% this year and then rise 21% in
2021.In other words, the prediction is that economic conditions will
recover so quickly that by December 2021, corporate profits will be back
to where they were when COVID-19 began to spread in late-2019.
In the alphabet soup of economic scenarios, analysts expect a V-shaped
recovery that is turbocharged by effective containment of the outbreak
and abundant government stimulus.Many countries around the world are
clearly not close to fully reopening their economies. But the latter
condition — stimulus — has been successful and unprecedented, ranging
from the Federal Reserve's purchases of select junk-rated corporate debt
to the checks wired straight to Americans' accounts.
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This helps explain why the S&P 500 has already retraced more than
half of its losses after its fastest 30% decline ever. Once again,
investors are buying equities knowing fully well that the Fed is ready
to act as lifeguard.
“Yet there is zero evidence historically that markets can go up on a
sustained basis whilst profits continue to slump,” Lapthorne said.
“Equity markets may have bounced but investors still seem to be
positioning themselves for a drop.”For proof of the ongoing risk to
corporate profits, keep tabs on what companies are doing with their
cash. Goldman Sachs strategists estimate that cash spending among
S&P 500 companies will fall by a record 33% to $1.8 trillion this
year. The decline includes cuts to dividends — another area where proof
of cashflow constraints can be found. By adjusting for the expected drop
in EPS this year, UBS estimates that the median S&P 500 dividend
will fall 28% to $1.47. The largest expected dividend reductions are in
cyclical sectors like energy and materials.Lapthorne is not the only
strategist concerned that earnings expectations are still too high, even
though they have been reined in by the pandemic.
“We are concerned 2021 numbers now need to be cut more aggressively,”
said Lori Calvasina, the head of US equity strategy of RBC Capital
Markets, in a recent note. Her 2021 EPS forecast that factors in a
“healthy economic recovery and margin expansion” is $153, below the
consensus forecast for $170.In addition, she noted that several
executives have told analysts on earnings calls that the journey to get
the economy back to its pre-coronavirus strength will be slow and
uneven. These observations contrast the market's march higher — at least
in Lapthorne's books. And the mismatch is one that may be corrected by
another sell-off.
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