Ooh, and it's alright and it's coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where we started from…
There are so many fantastic things about Maxine Nightingale's song "Right Back Where We Started From" (Don't know it? Check it out here).
Of course, her fantastic voice carries the song. The recorded version has her singing in a higher key, but she really lets it rip in a lower key when she sings the song live (here). The driving synthesizer and bassline combo hit hard right from the start while the baritone sax and handclaps add just the right emotional depth. The legend associated with the song's original production has it recorded in one take - Nightingale came in and slayed. At the same time, the session musicians (two were supergroup Electric Light Orchestra members!) laid down the track live in the studio. To say that it’s uncommon for a group of musicians to record a live track in a single take would be a vast understatement, you might not know it just by hearing it, but there was something magical about that recording session.
Speaking of being right back where we started, that is exactly where we are with the long-term estimate of corporate earnings growth in the U.S. despite the coronavirus craziness of 2020. In the chart below, the orange line represents the best estimate of the aggregate earnings growth by analysts and uses the left-hand axis. Notice today - after a period of extreme volatility during the April - June period for the estimate - we are right back to where we started from in March, around 6.5%.
The green line is the price level of the S&P 500 Index using the right-hand axis. Similarly, after a period of extreme volatility in March, we are also right back to where we started from.
Notice the equity index bottomed and turned around a lot earlier than the earnings growth estimate bottomed and turned around. This is a fundamental concept that most investors have a hard time learning: capital markets are very good at discounting future expectations quickly, that is, before everyone else figures it out! Maybe the stock market isn't so "dumb" after all. Perhaps what appeared to some as an unsubstantiated rise in equity markets beginning in late March was simply the market doing what markets do: discounting the future.
Of course, capital markets are not always correct. However, in this case, the market predicted the timing of both the upswing and the unexpected strength of long-term earnings growth.
Now, if we can get the number of coronavirus cases back to where we started from…