In a special survey just two months ago, 451 Research asked senior tech investment bankers several questions about how COVID-19 was impacting their work, such as deal pipeline and valuations. While bankers accurately forecast the coronavirus would decimate tech acquisition activity, their crystal balls got a little cloudy when it came to predicting how the equity market would fare during this unprecedented period.
Specifically, we asked how long they thought it would take for the S&P 500, which was down about 25% from its pre-coronavirus peak when the survey was open in mid-April, to get back to its late-February level of roughly 3,200.
- Just 2% of respondents said it would happen before the end of Q3 in September, and only another 8% thought the index would recover by the end of the year.
- The rest of the bankers had to extend the timeline for recovery: 38% indicated in Q1-Q2 2021, 30% in Q2-Q3 2021, and 22% said it wouldn't happen until 2022 or later.
The fact that the S&P 500 roundtripped in basically a quarter – rather than a year or more, as nine out of 10 of the survey respondents forecast – is remarkable. (Thanks, Jerome Powell.) It's all the more remarkable when we consider, on a relative basis, how much more expensive the current market is than before the coronavirus outbreak.
Because business has collapsed in the recession caused by COVID-19, almost all companies are selling less and earning less. Basic math dictates that in any valuation metric, if the numerator stays the same but the denominator decreases, the end result of that calculation will necessarily increase.
That comes through clearly in the rebound of the S&P 500. With the index now at roughly 3,200, investors are currently valuing its composite companies at 25x their (lowered) future earnings, compared with a pre-coronavirus multiple of about 20x forward earnings, according to S&P Global Market Intelligence. In other words, they are paying higher prices for lower performance.
Brenon Daly oversees the financial analysis of 451 Research's Market Insight and KnowledgeBase products, having covered more than a quarter-trillion dollars' worth of deal flow for both national publications and research firms.
Sheryl Kingstone leads 451 Research’s coverage for Customer Experience & Commerce, which covers the many aspects of how customer experience is a catalyst for digital transformation. She oversees the company’s coverage of a variety of customer experience software markets spanning ad tech, marketing, sales, commerce and service.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.