“The risk-reward for equity is maybe as bad as I’ve seen it in my career,” legendary hedge fund manager Stanley Druckenmiller said to the Economic Club of New York this week.
And he’s not wrong.
With more than 86% of S&P 500 companies reporting for the first quarter, earnings are currently on track to fall 13.6%, according to FactSet. That makes the worst quarter in around 11 years, and the the rest of the year is set to be even worse.
Current forecasts paint a dismal picture with a 40.6% drop in the second quarter, a 23% drop in the third, and an 11.4% drop in the fourth quarter for an index that is trading at 20.4 times forward earnings. That’s the richest valuation seen in 18 years.
And this all comes with a backdrop of a pandemic that has produced the worst jobs picture since the Great Depression with at least 20.2 million jobs lost in April alone.
While stocks fell into a bear market from mid-February through the bottom on March 23 as the coronavirus shutdown the global economy, stocks have since soared with the S&P 500 rising 27.5% since then.
This bounce back came as the Federal Reserve delivered unprecedented actions to help support the market, and began buying ETFs of corporate bonds this week to shore up the credit markets.
Druckenmiller also believes the market is overreacting to positive headlines about Gilead’s (NASDAQ: GILD) experimental drug, remdesivir, for treating COVID-19.
“I don’t see why anybody would change their behavior because there’s a viral drug out there,” Druckenmiller said.
Druckenmiller isn’t the only investing heavyweight to take note of the market’s rich valuation this week.
Billionaire hedge fund manager David Tepper told CNBC this week that the stock market is one of the most overpriced he’s ever seen, only behind that of 1999.
“The market is pretty high and the Fed has put a lot of money in here,” Tepper, the founder of Appaloosa Management, said. “There’s been different misallocation of capital in the markets Certainly you are seeing pockets of that now in the stock market. The market is by anybody’s standard, pretty full.”
Tepper also cautioned that just because the market might have put in a bottom back in March, “that doesn’t mean you can’t fall significantly from these levels.”
And according to Tepper, some popular stocks like Amazon (NASDAQ: AMZN) are already “fully valued.” Amazon shares are up nearly 30% so far this year, and are up around 47% since the stock’s mid-March bottom.
“Just because Amazon is perfectly positioned doesn’t mean it’s not fully valued,” Tepper said. “Google (NASDAQ: GOOGL, GOOG) or Facebook (NASDAQ: FB)… they are advertising companies. They are not rich but they may be fully valued.”