- Prior to Thursday’s sell-off, the S&P 500 had rallied nearly 45% in just 56 trading days since March 23. In doing so, it has raced through several stages of a typical market recovery. Initially led by consumer staples, as is traditional during recessions, market leaders have quickly changed places as the recovery has picked up steam.1
- Most recently, lower-quality stocks have taken the lead. For example, recent gainers include stocks of previously beaten-down energy companies along with cruise lines, casinos and retailers, whose returns have now far outpaced those of the broader index since March 23.1
- Market participants appear to be betting on rapid economic and earnings recoveries for these companies. Despite last week’s positive jobs report, however, analysts’ earnings expectations as recently as May 31 remained deeply negative for the S&P this year while the Fed reiterated on Wednesday that the public health crisis poses considerable economic risks beyond just the short term.2
- The chart shows analysts’ calendar year earnings estimates for companies in the S&P 500 through the first five months of each year since 2005.2 2020’s estimated EPS decline of nearly 30% marks the S&P’s largest such decline since FactSet began tracking the annual bottom-up EPS estimate in 1996.2
- Given the still highly uncertain macro environment combined with a deeply negative earnings picture, it seems fair for investors to question whether the market’s rise over the past 2+ months has come too far, too fast. Prudent investors may consider now a good time to insure their portfolios against further volatility.
1 Bloomberg Finance, L.P.
2 FactSet, “Record-high cuts to S&P 500 EPS estimates for CY 2020 to date,” https://bit.ly/2zkPyii.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice, and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. FS Investments cannot be held responsible for any direct or incidental loss incurred as a result of any investor’s or other persons reliance on the opinions expressed herein. Investors should consult their tax and financial advisors for additional information concerning their specific situation.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
All investing is subject to risk, including the possible loss of the money you invest.