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Analysts at Westpac Institutional Bank underscore the large disconnect between the US GDP growth expectations and US equities.

Key quotes 

“The latest consensus median estimate for Q2 GDP (sourced from Bloomberg) is for a 25% qoq annualised decline, though the tail includes a handful of forecasters expecting an epic 40% to 60% qoq annualised contraction. Consensus expects a ‘muted’ 7.2% increase in Q3 GDP and 5.7% in Q4.”

“With GDP expected to decline at least as much as 2008/09 S&P500 earnings per share could understandably be down anywhere from 40% to 60% on levels a year ago.” 

“On the S&P 500 forward PE ratio vs GDP growth metric, the one-year ahead expected PE (currently 14.4) can be expected to be down 4-6 points vs year ago levels. At a minimum, these metrics should cap upside potential for US stocks.”

“It would not be unprecedented going forward if stocks decoupled from less disrupted funding and credit markets. While funding and credit markets were anything but ‘normal’ in early 2009 spreads nevertheless had returned to pre-crisis levels then, thanks to central bank intervention. Yet equities continued to fall.”