We’ve since had a 12% bounce over 15 days. But we need another 7% to recoup the losses from December 3.The good news: The catalysts for a big recovery are in place — not only to recover the December 3rd levels, but to print new all time highs in the stock market.
Remember, major turning points in markets are often driven by some form of intervention. In this case, we’ve had it. We had intervention from the U.S. Treasury on December 23/24, 1) calling out to the six largest U.S. banks, and then 2) calling a meeting with the President’s Working Group (which includes the Fed).
Just days later, the Fed sent a clear message to markets that they were there to promote market stability (that means higher stock prices).
Add to this, we’ve entered Q4 earnings season, and we’re getting plenty of positive surprises already, on expectations that were already dialed down substantially in the wake of the stock market decline of the fourth quarter. As of last Friday, 90% of the companies that had reported beat Wall Street’s expectations.
So, where can stocks go from here?
Even with the sharp recovery over the past several weeks, the P/E on this year’s earnings estimate is just 15. That’s cheap relative to history. It’s very cheap relative to historical low interest rate environments.
If we apply Wall Street’s estimate on earnings for the S&P 500 (which is $172), to a P/E of 18 we get 3,096 on the S&P by the end of the year. If we apply a 20 P/E, we get 3,440. That’s argues for anywhere from 18% to 31% higher for 2019.
Keep in mind, that’s if Wall Street hasn’t undershot on its estimate. But they tend to undershoot often (to the tune of about 70% of the time).