The battered S&P 500 index is not pricing in a recession, according to DataTrek Research. “At 4,000, the recession odds imbedded in S&P are close to zero,” said DataTrek co-founder. “By our math, 50:50 odds of a recession equate to an S&P at 3,525.”
“At 4,000, the recession odds imbedded in S&P are close to zero,” said DataTrek co-founder Nicholas Colas in a note emailed Tuesday. “By our math, 50:50 odds of a recession equate to an S&P at 3,525.”
The U.S. stock market has tumbled this year amid fears over high inflation, rising interest rates, the Russia-Ukraine war, China’s COVID-19 lockdowns and a slowing economy. “If we do actually get a typical economic downturn, then the S&P should trade for right around 3,000,” according to Colas. So a “garden variety economic contraction” would put S&P 500 earnings at $161 a share, or a 26% drop from the current $218 a share, DataTrek calculated. A 50% chance of recession translates into $190 per share, the note shows.DataTrek looked at the troughs of price-to-earnings ratios around the past three recessions, estimating an average multiple of 18.5 based on troughs in 2020, 2009 and 2002.
So the S&P 500 “needs to go to 3,525,” based on the average 18.5 multiple seen in prior economic downturn troughs, “just to discount 50:50 odds of a recession,” the note shows. The S&P 500 would trade around 3,000 in a typical recession based on that same multiple and earnings at $161 a share.
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