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Wednesday, 13 May 2020

Patience, grasshopper

Earnings destruction

There are a few more upcoming trading and earnings updates due this week, which aren't likely to paint a great picture, with earnings and dividends expected to take a big hit.

US earnings are also deemed likely to crater, while stock prices have drifted higher again after their initial plunge. 

Since March 23 EPS has declined by -16 per cent, while the SPX (S&P 500 Index) was up by nearly +29 per cent before the overnight trade, which is a fairly extreme divergence!

Source: Factset

The CAPE ratio for US stocks points towards somewhat positive expected real returns over the decade ahead from current levels. 

But the risk/reward ratio is about as hair-raising as it's possible to imagine right now.

In fact Stanley Druckenmiller noted overnight that it's the worst he's ever seen. 

Of course, commentators aren't always right in their predictions - and investors shouldn't use valuations in order to time the market - but to assess risks as well as rewards, and manage exposure accordingly.