• SPY ETF continues to exhibit choppy uncertain patterns.
  • Equity investors are growing increasingly pessimistic.
  • US economy now looking more likely to enter a recession.

The equity market staged a strong recovery on Tuesday as traders returned from the long weekend in an optimistic mood and lifted stocks higher across the board. All sectors finished in the green with XLE Energy finishing up 4% and the Nasdaq led the index performance charts. 

Also readWalmart Deep Dive Analysis: Hold WMT to play defense vs upcoming US recession 

SPY ETF news: A false dawn?

This morning sees yet another turnaround and false dawn. Equity markets in Europe are down sharply and USA futures are looking anywhere up to 2% lower from the open.

Sentiment remains bearish and talk of a US recession is now commonplace. Just to reiterate the average bear market lasts approximately one year with an average 40% fall. Outside of a recession, things are a little better with an average 30% fall. Hence the obsession with recession. We feel the US will enter a recession and it may be already in one. Last quarter saw a negative 1.4% GDP growth rate so one more negative quarter and the US is technically in a recession. The next US GDP release is not until July 28 so we will have to wait until then.

However, readers of our weekly preview note will be aware we highlighted the real-time Atlanta Fed's GDPNOW tracker is at 0.0% so a recession may already be among us.

What is drawing increasing focus is what happens to earnings during a recession and to valuation ratios. current forward earnings per share (EPS) forecasts for the S&P 500 are at $250. The current forward P/E multiple is 15 giving us the current S&P 500 price of 3750. 

Source: Factset

The forward P/E ratio for the S&P 500 does tend to vary and in times of recession can move to nearer to 10. Over the past 10 years, we are at the historical average but recent events such as the 2018 taper tantrum saw it move to nearer 12. Earnings per share (EPS) tend to move lower by approximately 5 to 10% in times of recession. If we assume the 2023 EPS forecast of $251.52 (chart above) moves down 10% that gives us $225. Then applying a multiple of 12 gives what we feel is a worst-case price target for the S&P 500 (SPX) of 2,700. Look out below. However, if we maintain the current average forward P/E around current levels, which is after all the ten-year average, then things look a bit better. Using 15 for ease implies a price target of 3,375 for the S&P 500. About 10% lower than where we currently are

SPY ETF forecast

Look where 3,375 for the S&P 500 brings us to, back where it all began, the 2019 high just before the pandemic. Wake up, Bobby Ewing, it was all a dream. No one is going to get that aged reference! 

SPY chart, weekly


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