00:00 Speaker A
So what you’re saying is that the the effect of tariffs is not priced into markets?
00:08 Speaker B
No. I don’t think the effect of tariffs is fully priced into markets. Because if you look at what’s happened to stocks this this year, they have gone down, but they’ve gone down primarily because of the magnificent seven stocks. If you look at the other 493 companies, they’re basically flat for the year. Uh that’s not what you would expect from a market that’s priced in a recession. If you look at, say, the German DAX, a very cyclical stock market, I just recently hit an all-time high. So what we’ve seen this year is some fizzling of the AI story, but we haven’t yet priced in a recession. If we do price when it price when in, I think the S&P goes below 5,000.
00:59 Speaker A
Below 5,000? And yeah, magnificent seven has been a real dog of a trade this year. It’s been it’s been awful. So that’s where I I wanted to, you know, follow up here on is how much is down? How down is down for stocks? Because the S&P 500 is already down year to date, Nasdaq is down year to date, MAG seven is down. Like, how severe could this get?
01:25 Speaker B
Well, I’m by far the most bearish, uh, strategist, uh, in the Bloomberg survey, by far. My S&P target for the end of the year is 4450.
01:40 Speaker A
4450, which is about 1,000 points lower.
01:43 Speaker B
I have a look at down with a sad face on my doc.
01:47 Speaker A
Okay. 4450. It’s actually what I did, guys. 4450 with a smiley face down somewhere. With a frowning face. Uh now, the thing is to get to 4450, you don’t have to make any wild assumptions. All I’m assuming is that the forward P multiple on the S&P 500 drops to 18 and that earnings estimates are cut by around 10 percentage points from current levels. Neither of those two assumptions is outlandish. If you think about where the stock market traded between 2015 and 2019, a period which didn’t feature a recession, a period which incorporated most of Trump’s first term, the average forward P multiple was 16.8. So I’m talking about 18 in a recessionary scenario. That’s actually not bearish at all. Likewise, a decline in earnings estimates of 10 percentage points, in a typical recession, the drop in earnings estimates is closer to 20 points. And of course, this time around, analysts are very, very optimistic. They expect earnings to grow by over 12% over the next 12 months. So a 10 percentage point drop in estimates still leaves you with flat earnings. So if anything, that 4450, which is 1,000 points lower than the next, uh, strategist in on the Bloomberg list, could be too optimistic rather than too pessimistic.
01:52 Speaker A
That’s right.
02:00 Speaker B
Take that one.
02:01 Speaker A
Yeah, yeah.
