The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Sebastian Pellejero
NEW YORK, April 7 (Reuters Breakingviews) - The age-old warning to unsophisticated investors hungry to buy a dip: beware catching a falling knife. U.S. equity markets are collapsing, with the S&P 500 heading towards the 20% bear market decline threshold after notching its worst two consecutive trading days since March 2020. It might just be the start. As investors parse through the damage after President Donald Trump raised U.S. tariffs to their highest level in a century, market volatility is spiking and forecasts for earnings are tumbling, promising yet more downside.
Traders have yet to fully grasp this new reality. Wall Street estimates for earnings per share of the S&P 500 Index .SPX, representing the earning power of the biggest U.S.-listed firms, still hovers a bit over $275 for this year, up 13% from 2024, according to LSEG data. As analysts grapple with the details of rising costs and potential economic blowback, some banks are now lowering their projections. Goldman Sachs has reduced its guess on earnings-per-share growth to 3%, while UBS has cut all the way to zero.
Rising risks of economic catastrophe amp this up further. UBS expects two quarters of negative GDP growth this year, enough to qualify as a recession, if tariffs are fully implemented. At prediction market Kalshi, the odds of such an economic contraction have crossed 60%. Since World War Two, S&P 500 earnings have dropped by a median of 13% from peak to trough in recessions, according to Goldman Sachs. A similar drop from 2024 would result in an earnings-per-share target for the S&P 500 of $211 in 2025.
The real pain, though, comes if investors begin to ascribe less value to each dollar of profit. Buoyed by the immense growth of technology companies like $2.8 trillion iPhone maker Apple AAPL.O or $2.3 trillion semiconductor firm Nvidia NVDA.O, the S&P 500 has traded at a median of 20.5 times estimates of year-ahead earnings since 2020, according to LSEG data, up from 16.9 times during the five years prior. As of April 4, the ratio stood at 18.4. In a world where U.S. profit margins are strained by protectionist policies, any premium over the recent past looks suspect.
In its “bear case” scenario, JPMorgan anticipates no tariff relief and zero earnings-per-share growth through 2026. Applying a one-year forward multiple of 16 times, the bank’s researchers get an S&P 500 price target of 4,000 by year-end, nearly a fifth below Monday’s open. Anyone trying to grasp hold of this freefall may end up with a nasty gash.
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CONTEXT NEWS
Major global stock indexes fell on April 7 for the third-straight session in the wake of President Donald Trump’s announcement of sweeping tariffs on U.S. trading partners. The S&P 500 is down around 12% from the close of trading April 2, falling into bear-market territory. The CBOE volatility index surpassed 50 points, its highest level since the onset of the Covid pandemic.
The S&P 500 is trading above its historical multiple https://reut.rs/43JTy7Y
(Editing by Jonathan Guilford and Pranav Kiran)
((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))
