macroguy

Market Not Buying Forward P/E Estimates

It is not far fetched to envision GDP (that is US revenues) dropping 1.5% over the next year and earnings as a % of GDP dropping
from 11% to 8.5% (that is earnings). Given the Fed's potentially excessive stimulus, after the flights to safety subside it is not inconceivable to imagine the 10 year bond going to 6% and an overall stock market p/e of 16.5x (versus around 15 as of today). If all of that happens, you should expect to see the market drop by down to almost 10,000 or by as much as 18%. That said, if the 10 yr bond goes only to 5.5% all else equal we only have another 10% to go. If earnings go to 9.5% then we would have another 8% to go. So...how far is the bottom? Best guess is down 8% to 20% from here.