Fear is back in business as indicated by the rising number of stocks whose share price is in negative momentum territory (red line in chart below). Whilst the current proportion (30-40%) is a far cry from the unprecedented 85% peak reached in March, it may be heading to higher levels as the outlook on the macro front may well not be a recovery in H2 20 as widely anticipated.

The extent of the disaster where about half of the staff in non-public organisations is either on the dole or some sort of “Kurzarbeit” is slowing sinking in, as is slowing sinking in the fact that there is no quick solution to the pandemic. With no health solution beyond a vaccine in 18 months at best, exiting lockdowns everywhere is bound to be a messy affair with impossible to predict consumer behaviours. The omen is bad with current consumption at home, even for staples, being a fraction of pre-COVID spending while the Chinese consumer post lockdown is certainly getting a much-needed haircut but is not exactly splashing out, a direct reflection of rising unemployment.  

As long as Central Banks’ guns have been blazing red hot (even on investment grade debt being bought…), the V-shaped recovery’s simplistic hope was that by September, at worst, business would be essentially back to normal. This is not going to happen. Earnings forecasts (including AlphaValue’s) allowing for say a Q3 at 75% of Q3 19, and a Q4 at 100% or so will just prove rosy ones. So that 2021 is not going to be back to 2019 and we should contemplate a scenario where 2019 is recovered by 2023 at best.  

That is not priced in. As usual it is tempting to push aside the (current) 41% drop in earnings in 2020 vs. 2019, when 2021 shows a 48% increase on the previous year.  

It is a different story to look at the issue in hard cash. The following table shows that COVID bites and painfully so. We are unable, at the current juncture, to give a first set of combined forecasts for 2022 as modelling is in progress and we have yet to allow for further likely downgrades in H2 20.  

Remember that not a single company is committing guidance by now. That should be telling.  

Earnings in hard cash: ugly and worsening

With a 2020 P/E at 22.5x on earnings bound to be trimmed and receding hopes of a quick fix on the health front, expect another leg down in equities.

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