Updated: Jul 3, 2020
Since 2012, companies earnings have been declining. That did not stop stock prices from breaking record highs. Demonstrating a complete disengagement from the core fundamental of the capital markets - the relationship between earnings and return
Since the sub-prime crisis, we have experienced an almost uninterrupted rise in share prices while constantly breaking records.
Following the Corona crisis, many question marks are rising:
When will we exit the containment phase and move into the growth phase ? forecasts speak of coming 2021 as a year of growth, but even in the optimistic scenarios we will still be in stagnation compared to the pre-epidemic period
If we look at today's immediate challenges: The bankruptcy storm, the disruption of major business models like tourism, entertainment, air transportation, the commercial and offices real estate industry - How would it affect the global economy and especially the banking sector? Provisions for doubtful debts will leap and it will impact the whole financial sector profits.
How will the social distancing and continues on going pandemic costs will affect corporate profits? The whole entertainment and dining world will have to reinvent itself with economic models that fit low occupancy and high costs.
We all hope for an effective vaccine soon - and what if it will take another year or two?
One thing is for sure - corporate profits in the coming quarters will plummet - before the world moves into a full containing life along with outbreaks of deadly, paralyzing epidemics.
The effect of a significant fall in corporate profits can be learned from the graph area relating to the 2008 sub-prime crisis.
In a properly structured economy - that's what had to happen, and it did.
So - in the wake of what is expected to happen with corporate profits in the coming quarters -
The train of the "end of disengagement" already left the station. Realistically, it is not wise to just hope that flooding the rails and the whole world with surge of money, will be able to stop it.
PRICES WILL GO DOWN !
If we think logically - the world after the end of the disengagement will be more proper one - the link between profits and prices is the right economic basis for living in a real economy, outside the bubble.
The second quarter reporting season will begin in early July - it can be so bleak like never been before. This will be another significant step in the end of the disengagement process.
How does this affect the current sentiment of the market?
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