Page 9 - ISQ UK Aprl 2020

2020 Price Target

EPS
S&P 500 ESTIMATE P/E PRICE
US Equities Bull Case $167 21x 3,507

J. Michael Gibbs, Managing Director, Equity
Portfolio & Technical Strategy Base Case $155 19.5x 3,023

Joey Madere, CFA, Senior Portfolio Analyst, Bear Case $130 16x 2,080
Equity Portfolio & Technical Strategy
Source: Raymond James Equity Portfolio & Technical Strategy

The market’s selloff since the peak on 19 February has been economic data and corporate profits find a
historic to say the least, reaching -34% at the lows on 23 March. P/E FORWARD trough. Stocks have historically bottomed
MULTIPLE
With the global economy screeching to a halt, and the number of 19.5x four months prior to recession end and four
new COVID-19 cases increasing every day, global equities are to six months before earnings trough. For
understandably on the defensive. Admittedly, it is nearly example, the credit crisis P/E bottomed at
impossible to have a great deal of confidence in economic and 10x, and expanded to 17x by the time
2020
fundamental assumptions with the duration of the COVID-19 PRICE TARGET earnings troughed. For this reason, we
pandemic so uncertain and fluid at the moment. However, the maintain a 19.5x P/E year-end base case
economic outlook has worsened dramatically in recent weeks. 3,023 forecast as the market tends to discount the
The key is the spread of the virus. In our base case assumption, we eventual recovery ahead of time. This results
look for the number of new COVID-19 cases to plateau around in a base case S&P 500 target of 3,023 for 2020 reduced from
Memorial Day. In this scenario, we anticipate a pronounced 3,400. 1
economic slowdown at the end of Q1, throughout Q2, and
lingering into Q3. This most likely results in a very sharp, but short Our bear case assumes a deeper recession that lingers, resulting
recession, allowing time for the economy to start showing signs of in a 3% GDP contraction this year and $130 in S&P 500 earnings
a recovery in the fall and latter half of the year. (-20% y/y earnings decline). Using a 16x P/E multiple, the result is
a bear case S&P 500 target of 2,080. At this point, uncertainty
This base case scenario brings our S&P 500 earnings estimate for regarding the ultimate economic impact and, more importantly,
2020 down to $155, reflecting a -4% earnings contraction for the the magnitude of recovery by year end, leaves us with guarded
full year. From a valuation standpoint, the S&P 500 now trades at confidence in our forecasts. In the coming weeks, additional
a ~15x price-to-earnings multiple (P/E), below the long-term information regarding the virus spread and need to keep
average of 16.5x and 28% lower than the peak 20.7x P/E seen on businesses locked down should improve forecasting ability.

Full-year 2020 $ 155 $ 167
earnings estimate

19 February . On average, bear markets historically have seen P/E
multiples contract by 28%. Looking forward, it is important to
remember that the stock market is a forward-looking mechanism,
meaning valuation multiples will start to rise long before

1 The January 2020 ISQ outlook showed an S&P 500 price target of 3,400 for 2020.
8 8