(Bloomberg Intelligence) — The S&P 500 could stretch to 3,300 to price in a recovery half as strong as average beginning in 2H, according to our scenario analysis, but it will take EPS growth closer to average to return the index to former peaks. Analysts forecast a well-below average EPS rebound, with S&P 500 gains to 3,200 over the next year.
Equity-market valuations should stay a bit high against a backdrop of lower-for-longer interest rates, as long as the virus doesn’t accelerate again, taking down forward earnings forecasts even more.
In a bear case, where the recession is extended and earnings tumble another 10%, stocks could sink to 2,640. In a bull case, however, where EPS growth matches long-term average growth of 10% in the first year of recovery, stocks could close in on 3,680.
The Covid-19-fueled earnings recession will likely be unique: Bigger declines usually are followed by larger recoveries, but that’s not expected this time.
The Covid-19 earnings recession figures to be unique for both speed and depth, potentially disrupting the market multiple severely. Nonetheless, if rates remain low and credit spreads continue to tighten, the multiple will likely remain high.