Estimating The Earnings Crash

In early March, before the impact of the COVID-19 was fully understood, I penned an article suggesting that both corporate profits and S&P 500 earnings were suggesting the “bear market wasn’t over.” To wit:

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

At that time, the impending recession, and consumption freeze, was only starting and we had no data to suggest just how bad it was going to get. Since then, we have had epic declines in manufacturing, surging unemployment, and plunging retail sales. To wit:

“From the decline of 8.7% in retail sales, 40% of PCE, we can extrapolate the decline into expectations for PCE growth. Again, since PCE comprises almost 70% of the economy, this is why expectations are for a drop of 10%, or more, in GDP in the second quarter.”

But it isn’t just retail sales. It is also exports which account for about 40% of corporate profits overall, which are seen sliding dramatically in March.

This all suggests dramatically lower corporate profits and earnings per share for the S&P 500 index.