Earnings should start to recover by the end of the year. Estimates vary widely, but we think earnings could be down 20% for all of 2020, which would put S&P 500 earnings per share at $130.1 In particular, we think first quarter results will decline modestly, with a steep drop in the second quarter. The third quarter could also be rough, but we think earnings will start to climb by the fourth. At this point, we think earnings could rebound in 2021 and climb by around 23% to $160.
Selectivity and nimbleness look to be critical. As markets climb out of their deep hole, we think there will be a notable difference between winners and losers. Relative valuations between individual stocks are at extreme levels. At the height of the volatility in mid-March, the relative valuation between the average stock and the most inexpensive reached its third-highest reading in the last 100 years, exceeded only by the Great Depression and the financial crisis.2 We are currently seeing value in some cyclical areas and in companies that have quality earnings sustainability and decent levels of free cash flow. Likewise, we’re seeing extreme valuation differences between stocks and bonds, which suggests that investors with long-term time horizons and can tolerate short-term swings could consider allocating into equities at the expense of bonds such as Treasuries.
Factors to watch from here? We think it would be premature to call a bottom to the current crisis, but we are monitoring certain factors for clues to future market action, including coronavirus data, credit spreads, the yield curve, copper prices and weekly jobless claims.
Investment Considerations
1. Expect high (but slowly receding) volatility.
2. Consider dollar cost averaging into and out of positions.
3. Start positioning for economic recovery.
4. We suggest owning a few more high-quality cyclicals and fewer defensive growth stocks.
5. Diversify across asset classes and geographies.
6. Focus on quality and free cash flow.
7. Consider an absolute return strategy to complement market exposures.
Robert C. Doll, CFA, is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Morningstar Direct, Bloomberg and FactSet
2 Source: Empirical Research Partners