Most of Jeremy Grantham’s note this quarter (login and PDF) is devoted to eviscerating Alan Greenspan, Ben Bernanke, and other approval-seeking Fed chairmen (Jeremy does it better than most). But Jeremy does save some powder for the “V-shaped recovery.”
As we’ve noted, analysts are somehow imagining that S&P 500 earnings are going to accelerate to 70% year-over-year growth by Q4, despite the paltry rate of earnings recovery in even the last, shallow recession. Jeremy’s take? Ridiculous.
Look at the amazing earnings estimates for the S&P 500! On January 1, the first quarter estimate was +12%. It is now -8%. Was the credit crisis still hiding on Jan. 1? Even now the forecast for this year is +15%. Plus 15%! What is going on? With denial skills of this magnitude, it is surely not a surprise that subtleties within the equity market such as quality versus junk have been misjudged.
The good news, from Grantham’s perspective, is that prices on high-quality stocks (low debt, strong profits, good growth) have now come down enough that they are priced for a 4% real return over the next 7 years. The bad news, for those plunging lock, stock, and barrel into speculative stocks, is that they’re priced to return -4% (real) per year.
And when does Grantham think the overall market will bottom? He’s sticking with 2010.
And why is he so bearish? Leaving aside the ongoing deterioration of fundamentals, because unlike every other bubble Grantham has ever tracked, the US stock market hasn’t yet gotten back to trend (never mind below trend). Grantham submits only two previous examples in this quarter’s note (below), but he has another dozen or so in reserve:
See Also: Sorry, the Stock Market is Still Screwed
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