Earnings For 2020 And 2021 Plunge, Leaving Stocks Overvalued

Earnings continue to pour in at a furious pace. While it seems as if many companies are crushing estimates, it is essential to remember that these are significantly reduced beats. Additionally, the number of companies missing estimates has risen dramatically. 

Apple (AAPL)

Apple, for example, reported revenue of $58.3 billion and earnings of $2.55 per share, beating estimates. But, the chart shows how much those estimates fell from the peak. I have owned Apple for a few years now, so I am picking on a stock that I own. 

Beat, Miss, Met

So far, data from S&P Dow Jones, shows that about 51.5% of the S&P 500 have reported results. Of those, 68% have beaten estimates, while 27.7% have missed, and just 4.2% have met. These are feeble numbers on a historical basis. 

(Source: S&P Dow Jones)

Meanwhile, earnings estimates continue to decline, and are now forecast to fall to $125.53 in 2020, and $166.81 in 2021. The S&P 500 had earnings of $157.12 in 2019. 

One In The Same

We care about earnings trends because the S&P 500 closely mimic those earnings. The only thing that changes is what investors are willing to pay for those earnings. Historically, the S&P 500 trades with a one-year forward earnings estimates of about 17-17.5, since 1988, with a range of 16 to 18. In good times, we can argue that the S&P 500 should trade around 18; in bad times, it should be closer to 16.

No Longer Cheap

As of April 30, the S&P 500 was trading at 23.2 times 2020 earnings, and 17.5 times 2021 earnings. Basically, as of April 30, the S&P 500 was already fully valued, and if the current trends of earnings persist and earnings continue to fall, the S&P 500 can either become even more high overall or will never fall. 

How Far

Again, as I have shown in the past, a typical recession results in a 30% decline in earnings and a 20% rebound the following year. The current estimates do not reflect the severity of this recession yet, and at down, just 20% are likely to drift to a decline of 30-40%. 

This means earnings of $110 per share in 2020, and if a robust earnings bounce of 25% in 2021 occurs, this gives us earnings of $137.50 per share and a fair value of 17 times one-year forward estimates valuation on the S&P 500 of 2385, or 15.7% below current levels. 

Anyway, something to ponder. We will know more once the earnings season is complete. Regardless, it suggests to me the risk isn’t missing out, but instead, getting sucked in.