Corporate profits are expected to rise about 1% this year. That is hardly recessionary activity. The market seems positioned for little if any economic decline.
The Fed's staff believes the banking crisis will precipitate a "mild" recession starting later this year. What happens to stocks in a recession, even a "mild" one? The National Bureau of Economic Research is the arbiter of recessions. The NBER defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. That's a pretty nebulous definition.
To get a sense of how optimistic the market is, let's take a simple case using Putnam's estimates. Let's be optimistic and assume that earnings decline 10% in 2022. Let's continue being optimistic and assume that the P/E ratio declines by 20%. Here's what happens. Current earnings est.: $220 10% decline: $198 Current forward P/E ratio: 18.6 20% decline in P/E: 14.9 Do the math: $198 x 14.9=2,946 for the S & P 500.
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