S&P 500: Contending a sweeping decline in earnings – Westpac

The Fed’s overwhelming policy response has contained the downside but equities still need to contend with a dramatic decline in earnings, per Westpac Institutional Bank. 

Key quotes

“While earnings forecasts are near impossible in the current environment and a record number of S&P 500 companies have withdrawn guidance, we do have a handle on GDP prospects and that top down signal for earnings provided by GDP expectations remains poor.”

“Earnings per share and the 12-month forward PE ratio tend to move in line with GDP growth. With activity expected to decline at least as much as 2008/09 earnings per share could be down anywhere from 40% to 60% on levels a year ago.” 

“GDP forecasts are consistent with the 12-month forward PE ratio falling 5-6pts on levels a year ago too (currently 18.7). It remains to be seen whether policy support can continue to grant equities immunity from the harsh reality of an earnings collapse.”