Do you ever wonder how much a recession can affect stocks? Well, hold on to your hats, folks, because the answer may just shock you! As a general rule of thumb, earnings will typically shrink by 10% to 20%, and multiples can shrink by 20% to 25%. And let’s be honest, things could get even uglier! But don’t worry, some eggheads at Putnam Capital Market Strategies did a granular analysis (whatever that means), examining 10 recessions that happened from the stone age to last year. The results showed that during these periods, earnings had an average decline of 16.4%, P/E compression of 26.0%, and the S&P 500 plummeted by 31.5%. Yikes! It looks like recession is the arch-nemesis of the stock market superhero.

But hold on to your rocket ship, folks, as it turns out, if there is even a recession coming, it hasn’t shown up in earnings yet! The “earnings recession” will reportedly be as shallow as a kiddie pool. Earnings may rise by 1% this year, with only Q1 and Q2 suffering, but Q3 and Q4 are expected to rebound and post record dollar earnings. There’s no recessionary activity there, my friends. The market is currently standing firm and looking at the future with a cheerful grin; it’s as if nothing can make it frown! So, let’s jump on this optimism train and follow Putnam’s estimates. Let’s assume that earnings will fall by 10% in 2022, and let’s keep swimming in the optimistic pool and assume P/E ratios fall by 20%. Great! So, according to my calculator, $198 x 14.9 = 2,946 for the S&P 500. Wait, what? A decline of roughly 25% from current levels?! Shoot, we need to hold on to something! And this calculation is based on optimistic assumptions! It can be way worse than this!!

But don’t despair, folks, because the bulls have something to cheer about. If a recession usually precedes a bear market, then the bear market might have already happened. According to Putnam, 7 out of the 10 recessions had a bear market beforehand. From the January 2022 peak to the October bottom, the S & P 500 declined roughly 25%, and the P/E ratio followed the same path. During 2022, the trailing P/E ratio for the S & P 500 index dropped from 24.7 to 17.3, a decline of 30.0%, which is approximately in line with historic norms. However, there’s still one thing missing from all this, and you can’t miss it if it’s not there! The recession hasn’t happened yet, so who knows? Maybe the bulls are right, and there will be a “soft landing.” If that happens, the bears can go back to hibernating, and we can finally breathe a sigh of relief.

Serious News: cnbc