Investors haven’t begun to price in recession: Here’s how far the S&P 500 could fall

Discussion in 'Wall St. News' started by Frederick Foresight, May 11, 2022.


    ‘Recent volatility simply says investors think the window of opportunity to get back on the right track is closing,’ but not yet shut, says DataTrek

    The battered S&P 500 index is not pricing in a recession, according to DataTrek Research.

    “At 4,000, the recession odds imbedded in S&P are close to zero,” said DataTrek co-founder Nicholas Colas in a note emailed Tuesday. “By our math, 50:50 odds of a recession equate to an S&P at 3,525.”

    The S&P 500 SPX, 0.23%, a stock benchmark measuring the performance of large U.S. companies, has dropped more than 16% this year after closing Monday at 3,991.24. That marked its lowest closing value since March 31, 2021, which was the last time the index ended below 4,000, according to Dow Jones Market Data.

    The U.S. stock market has tumbled this year amid fears over high inflation, rising interest rates, the Russia-Ukraine war, China’s COVID-19 lockdowns and a slowing economy. “If we do actually get a typical economic downturn, then the S&P should trade for right around 3,000,” according to Colas.

    “Recent volatility simply says investors think the window of opportunity to get back on the right track is closing,” he said. But the window “is not shut yet,” Colas wrote, “otherwise, the S&P would be at 3,500 (50:50 recession odds) or even lower.”

    DataTrek looked at the current “earnings power” of the S&P 500, pegging it at $218 per share. That would be “peak earnings” if the U.S. is heading into a recession, according to the note.

    “Recessions hit earnings, of course, but by varying amounts,” said Colas.

    While “standard recessions” cause an average 26% drop in peak-to-trough earnings, the S&P 500 saw a peak-to-trough earnings decline of 57% during the “Great Recession” ending in 2009, according to the note.

    So a “garden variety economic contraction” would put S&P 500 earnings at $161 a share, or a 26% drop from the current $218 a share, DataTrek calculated. A 50% chance of recession translates into $190 per share, the note shows.

    DataTrek looked at the troughs of price-to-earnings ratios around the past three recessions, estimating an average multiple of 18.5 based on troughs in 2020, 2009 and 2002. Colas tossed out the recession-related trough seen in 1990 as “market valuations were generally much lower than now due to higher interest rates.”

    With recessions odds 100% baked in at $161 a share, the S&P 500 would be trading at a price-to-earnings ratio of 24.8, according to DataTrek. That compares with a multiple of 18.3 based on $218 per share and no chance of recession, and a ratio of 21.1 at $190 a share and a 50 percent chance of an economic contraction.

    So the S&P 500 “needs to go to 3,525,” based on the average 18.5 multiple seen in prior economic downturn troughs, “just to discount 50:50 odds of a recession,” the note shows. The S&P 500 would trade around 3,000 in a typical recession based on that same multiple and earnings at $161 a share.

    “This is not a prediction, but rather a crude but historically defensible approach to assessing where the S&P ‘should’ trade if recession fears continue to grow,” according to DataTrek.
    piezoe likes this.
  2. Hello Frederick Foresight,

    All I know is this:

    I am Long and Strong the S&P 500 Index for the rest of my life. I have not read a stock market news article in years, and will not read a stock market news article over the next XX years.

    Nice and Easy.
  3. mikeriley


    I follow the same perspective concerning Finance media.
    Bro, I do hope you will also read the Chart, as currently
    the S&P is burning down. A beautiful market for some shorts.
    SimpleMeLike likes this.
  4. Millionaire


    Good luck, i hope you make $1million from this position.

    Can I ask what is your average entry price and are you buying more as the market goes lower?
    SimpleMeLike likes this.
  5. Hello Millionaire,

    How it goes buddy?

    You know my goal, $1M within 5 years day trading.

    As far as SP500 index, I been buying dollar cost averaging in it since I started working in 2006 every time I get paid at work. Very simple and easy money. Long and Strong SP500 index forever, this is for the long term millions of dollars.

    I hope explained well. If not, let me know.
  6. Hello mikeriley,

    How it goes buddy.

    SP500 index, I never read the chart. Just buy when I get paid at work automatically in 401K. Easy money. I never ready finical articles on long term investing. SP500 index only for life.

    Day Trading, yes I read the chart everyday, that is serious business.
  7. mikeriley


    Good deal Bro,
    As always I wish you continued trading success.
    SimpleMeLike likes this.
  8. Hello mikeriley,

    I had some beautiful longs and shorts in NQ, every day.
  9. deaddog


    That's a good goal. How much longer do you have to go to accomplish it.

    How do you balance your work life with day trading? What do you do for work or rather is it related to the financial /trading industry?
    SimpleMeLike likes this.
  10. Hello mikeriley,

    Guaranteed success betting on the SP 500 index. It is never wrong for the long term man.
    #10     May 11, 2022