How Do You Value Stocks When Earnings Plummet to Zero?

Market have shrugged off a torrent of horrific economic news. They have powered far above the post pandemic crash lows of March. The fastest bear market ever, down 34% in weeks, has led to a similarly startling snapback. From the March 23rd lows, we have seen blistering gains in the Nasdaq (36.7%), the S&P500 (32.8%) and the Dow Industrials (32.2%).1

This move towards all-time highs has the old guard questioning the rally, especially equity valuations:

-David Tepper call this the “most overvalued stock market” outside of the 1999 bubble.

-Stanley Druckenmiller is “bracing for a bear market.”

-Leon Cooperman suggested stocks could fall as much as 22%.

-Mark Cuban said “Stocks are overvalued and the risk-reward isn’t there till we see a cohesive plan for testing from the government.”

-Howard Marks cautioned “Those of us in markets believe that stocks and bonds are selling at prices they wouldn’t sell at if the Fed were not the dominant force.”

Are anecdotes from famous investors a fair way to measure valuations? I appreciate the insight of these billionaires, but allow me to suggest other ways to contextualize equity valuations:

Recent history: Since it is that 30%+ rally off the lows that seems to have startled so many, let’s use that as our leaping off point. Frame the present move in terms of the S&P 500 Index falling 34% to its March 23rd lows. That month was one of the 20 worst in market history, and the fastest bear market ever. Deeply oversold, the market rubber band got stretched too

Keep reading this article on Barry Ritholtz - The Big Picture.

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