The guest commentary below was written by written by Daniel Lacalle
Multiple expansion is back.
The S&P 500 Price to 12-month Forward Earnings multiple is back to almost pre-crisis levels.
Investors are ignoring the warning signs of companies eliminating guidance, slashing dividends and buybacks and the macro data.
Most investors are looking at 2020 as a lost year and focus on 2021 and the recovery, driven as well by massive central bank liquidity injections and rate cuts.
This may be a risky strategy because:
- The cycle was already weak prior to the Covid-19 crisis.
- Macro estimates already show that consumption and services may take a long time to recover.
- Many companies’ balance sheets have been severely damaged even considering a recovery.
- The V-shaped recovery estimates assume a return of capital expenditure and household consumption that is inconsistent with the debt and unemployment situation.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.