Via UBS:
How much could EPS fall in a recession and what’s the true market PE?
Using consensus, the market 12m forward PE is 14.7x. However, consensus does not appear to have fully accounted for COVID-19 due to uncertainty in the range of outcomes. So far consensus only expects a 3% contraction in market EPS next year relative to last, but given our economists’ view of a severe recession (with real GDP falling ~10% q/q in Q2), further downward EPS revisions appear almost inevitable. We estimate in a 6-month hibernation scenario, market EPS could fall 35%. Given we have estimates for trough EPS, we think it makes sense to talk about the price to trough EPS ratio of the market. If we use trough EPS estimates and assume capital raisings of 5% of the market’s market cap, the current price-to-trough-EPS ratio of the market is 22x.
