During the depressed earnings phase, market P/E ratios will be pulled down, giving a lower multiple of substantially lower earnings.

The prediction is about the 2020 COVID-era earnings slump. Both conditions must hold: (a) earnings fell substantially; (b) market valuation multiples for the S&P 500 (trailing P/E, forward P/E or CAPE) fell below their pre-downturn level of February 2020 and stayed there for a sustained period (months, not days) while earnings were depressed. Judge through the end of 2021. TRUE: both (a) and (b) hold, with multiples clearly below their February 2020 level for months. MOSTLY TRUE: both hold, but only on some of the multiple measures, or only for a short period of a few months. MOSTLY FALSE: earnings fell, but multiples dipped below their pre-crisis level only briefly (for example weeks in March 2020) and were otherwise at or above it. FALSE: multiples stayed at or above their February 2020 level throughout the depressed-earnings period, or earnings did not fall substantially.

Set before the research began.

1. E1 2020: The Year in Charts Charlie Bilello's Blog (Compound Advisors) · 4 January 2021

   “with earnings declining over 20% in 2020 and stock prices rising, the S&P 500 ended the year with a P/E ratio of 31, its highest year-end multiple in history.”

2. E2 Price–earnings ratio Wikipedia

   “the trailing P/E ratio reached 38.3 on October 12, 2020. This elevated level was only attained twice in history, 2001–2002 and 2008–2009.”

3. E3 S&P 500 Forward P/E Ratio Falls Below 10-Year Average of 15.0 FactSet Insight (John Butters) · 13 March 2020

   “On February 19, 2020, the S&P 500 closed at a record-high value of 3386.15. The forward 12-month P/E ratio on that date was 19.0.”

4. E4 A tale of two valuations does not necessarily imply US equities are expensive Evelyn Partners Investment Management · 22 May 2020

   “The US S&P 500 PE ratio is currently trading on 22.6x 2020 EPS expectations, the highest level for 18 years, thanks to both the equity rally and falling EPS expectations”

Condition (a) is met: E1 reports S&P 500 earnings declining over 20% in 2020. Condition (b) is not. On February 19, 2020 the forward P/E was 19.0 (E3). The title of that March 13 FactSet piece says the forward P/E had fallen below its 10-year average of 15.0. By May 2020, the S&P 500 traded at 22.6x 2020 EPS expectations, the highest level in 18 years (E4). The trailing P/E reached 38.3 in October 2020 (E2), and the S&P 500 ended 2020 with a P/E of 31, its highest year-end multiple on record (E1). While earnings were depressed, the evidence shows the forward multiple below its February 2020 level in mid-March. On the measures reported for May, October and the end of 2020, multiples were at 18-year or record highs.