Short
Sharp rise and fall of inflation leads to a fall in earnings
The last 4 out of 5 times since the Great Depression that we witnessed inflation rise above 9% and fall back down to normal rates, we saw a subsequent decline in earning between 22% - 45%.
The only time we did not see a fall in earnings was in 1946 after WW2 when the fed kept interest rates low to lower financing costs of the war and earnings were already depressed from the war.
Most analysts are calling for the S&P earnings to be around 230 in 2023 with more conservative analysts calling for 200.
If we take the median fall in earnings of 22% after inflation normalizes from an elevated peak, and we apply it to the S&P, we see a range of around 165.
Assuming that the fed increases rates above 5%, where we have seen the pe ratio between 16 and 18, we deduce a price target for the S&P 500 of $3,000.
The only time we did not see a fall in earnings was in 1946 after WW2 when the fed kept interest rates low to lower financing costs of the war and earnings were already depressed from the war.
Most analysts are calling for the S&P earnings to be around 230 in 2023 with more conservative analysts calling for 200.
If we take the median fall in earnings of 22% after inflation normalizes from an elevated peak, and we apply it to the S&P, we see a range of around 165.
Assuming that the fed increases rates above 5%, where we have seen the pe ratio between 16 and 18, we deduce a price target for the S&P 500 of $3,000.
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