If we want to understand whether the recent bounce is a true buying opportunity we need to believe that stocks are cheaper.
We need to look at the S&P 500 and the Stoxx 600 multiples, which suggest that forward Price to Earnings has not fallen nearly enough, and has returned barely to 2018 levels, which were already elevated.
The earnings season also shows us the poor level of growth in sales and earnings almost in every sector. Considering this earnings’ season has only included two weeks of lockdown, the severity of the second quarter hit may be underestimated.
Consensus estimates for 2021 earnings also seem surprisingly bullish. We need to understand that the 2020 downgrade cycle may be partly discounted by the market, but the 2021 downward revision of earnings estimates has barely begun.
Guidance, dividends and buybacks are being slashed, therefore we need to be very selective and look at opportunities knowing the depth od earnings’ revisions ahead and the impact of the crisis on cash flows and margins.
A version of this article first appeared here.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).