Wall Street weekahead: Coronavirus uncertainty muddies views on buying
opportunities for plunging stocks
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[March 21, 2020]
By Lewis Krauskopf
NEW YORK (Reuters) - U.S. stock valuations
are tumbling in the wake of the coronavirus-fueled market rout, but
determining when equities are cheap enough to buy is a tricky
The S&P 500's price-to-earnings ratio, based on earnings estimates for
the next year, has dropped from over 19 in late February to 14.2 as of
Wednesday, according to Refinitiv data.
The decline in forward P/E marks a drop from the highest level since
about mid-2002 to a level below the index's historic average.
But the numbers may be misleading. For example, many market watchers say
overall earnings estimates have yet to adjust low enough to account for
the economic fallout from the coronavirus pandemic. That adjustment
would mean stocks, based on price-to-earnings valuations, are less
attractive than they appear.
“It’s a little bit difficult to look at the P/E even for this year. The
estimates are going to come down; they are still too high," said James
Ragan, director of wealth management research at D.A. Davidson. "It’s
just so hard to even figure out what the impact is going to be."
Consensus earnings estimates for 2020 are for S&P 500 companies'
earnings to rise by 2.7%, Credit Suisse analysts said in a note on
Wednesday. That number falls to a decline of 0.7% for this year when
only estimates updated in the prior seven days were used, Credit Suisse
found, noting that "while we believe estimates will fall further,
'fresh' numbers better reflect current realities."
BofA Global Research on Thursday cut its S&P 500 forecast so that it now
projects earnings to fall 15% this year.
Companies may begin to shed some light on the economic damage when they
start reporting first-quarter results in the middle of April.
"We have no idea where earnings are going at all," said Lindsey Bell,
chief investment strategist at Ally Invest. "We are probably not even
going to get clarity on it until maybe Q1 reporting season ... and even
then I wouldn’t be surprised to see a lot of companies just pull
Already this week, FedEx and Marriott walked away from their 2020
forecasts because of the uncertainty from the coronavirus, which has
infected over 210,000 people globally and killed 8,900.
The S&P 500 has fallen 28.8% since its all-time record high close on Feb
19 and hit its lowest level this week since early 2017.
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Traders work on the floor of the New York Stock Exchange (NYSE) near
the close of trading in New York, U.S., March 12, 2020.
While price-to-earnings valuations are a moving target, the extent
of the drop has enticed investors seeking a potential bargain,
particularly those who can hold stocks for a long time.
For example, Brad McMillan, chief investment officer for
Commonwealth Financial Network, pointed to the number of stocks with
a heftier dividend than the yield on the U.S. 10-year Treasury note.
“I am not buying right now, but right now there is a powerful
economic argument for buying stocks,” McMillan said.
“We are getting to the point where stocks are already compelling
economically even if the emotional context may still take them down
Even as he braces for a decline in earnings in this year, Ragan said
there is a "pretty strong chance" of earnings growth in 2021.
“For a long-term investor who is trying to have some confidence
about investing now or hanging in there now, you can see light at
the end of the tunnel from a valuation standpoint once you start to
look to 2021,” Ragan said.
The S&P 500's tumble extended to over 32% earlier this week.
Investing in stocks at a 30% level of decline in the last two bear
markets, during the 2000 dot-com bubble and 2008 financial crisis,
"was a pretty good buying opportunity," Bell said.
For investors with at least a five-year investment horizon, now is a
"prudent time to start putting money to work," said Bell, who said
technology stocks appear particularly enticing.
"Expect that you might see it go down near-term but over the long
term you will be rewarded," Bell said.
(Reporting by Lewis Krauskopf; Editing by Dan Grebler)
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