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Investors are worried that corporate profits could fall if the U.S. goes into another recession.Currently, analysts are expecting around $112 per share in S&P 500 earnings, which reflects more than 10% year-over-year growth.
However, Morgan Stanley’s Adam Parker warns that if earnings decline, they could dive.
Parker points to recent history:
“We have heard investors suggest $80 in EPS was a fair bear case for 2012. We decided to look at history as a guide in assessing the bear case EPS. The 2001 recession saw a 13% revenue decline and a 57% EPS drawdown. The 2008 recession saw a 14% revenue decline and a 51% EPS hit, peak-to-trough. For 2012, bottom-up estimates (excluding financials) embed a 5% revenue INCREASE and just over 10% year-over-year EPS growth. If prior recessions prove relevant to next year’s economy, $54 to $68 in EPS in 2012 would be a more likely range than the $112 that the bottom-up consensus estimates currently embed.”
If you attached a 15 PE multiple to the low end of that range, which some would argue is a generous valuation, you’d get 810 in the S&P 500. That’s a 28% plunge from the index’s recent price.