With the S&P 500 drawdown at 34% and assuming unchanged valuation multiples it gives a market-based input to how much earnings could be down. If the worst case scenario plays out and we get a severe credit crisis then we could see new lows in S&P 500 and EPS decline of close to 50%. Time will soon tells us where the world is headed.
As we pointed out in our Market Call podcast this morning the VIX Index remains elevated above 60 suggesting more downside risks to equities in the short-term. But the VIX futures term structure also remains in steep backwardation with the second month contract on the curve trading at 37% discount to the VIX Index. But even more importantly the second month contract has risen in recent days despite the rally in equities suggesting the volatility market is not yet believing that equities have turned a corner.