Bank of America's stock chief warns the S&P 500 could fall another 26% as valuations remain too elevated and decades of market history show half of the criteria for a bottom still aren't being met
Of course, if the October 12, 2022 lows hold, that will no longer remain true when the current pullback is finished.Bank of America's Savita SubramanianIn every bear market since 1974, stocks have met at least eight out of the 10 criteria below before bottoming, Subramanian said in a note to clients on Monday.
The 10 criteria include: the Federal Reserve cutting rates in the prior 12 months; unemployment rising; more bearish investors than bullish; the equity risk premium rising by 75 basis points; 2-year Treasury yields falling by 50 basis points; the Bank of America Sell Side Indicator"Buy Signal" being activated within the prior three months; the yield curve steepening; a 5% bear market rally in the prior three months; the sum of inflation and the S&P 500's 12-month trailing price-to-earnings ratio being under 20; and the ISM Purchasing Managers' Index improving.Right now, only four of the 10 criteria are being met: bears are more numerous than bulls; the yield curve is steepening; there's been a 5% rally in the last three months; and the ISM PMI is up from its 12-month low. One crucial unfulfilled criteria is the Rule of 20, or inflation and trailing P/E not adding up to a total below 20. Historically, high inflation has commanded lower valuations. But the market is trading at a trailing P/E of 18.3 despite the CPI's current level of 6.4%. By a number of measures, the S&P 500 remains overvalued. According to a list of 20 valuation metrics compiled by Bank of America, 17 of them remain expensive relative to their historic average. During every market bottom since 1974, the percentage of valuation measures that remained expensive relative to history was 55% or lower, suggesting a de-rating still needs to occur before the current bear market can end. Subramanian expects that de-rating to come in the months ahead as a recession hits the US economy amid tight monetary policy from the Fed to fight inflation. She said she sees a floor of 3,000 for the S&P 500, which represents 25.8% downside from current levels. By the end of the year, she expects the index to recover to 4,000.Other strategists on Wall Street have been calling for a decline in valuations ahead. Perhaps the loudest of them is, who also sees the market falling to a range between 3,000-3,300 this year. In a note this week, Wilson said that the S&P 500 remains overvalued relative to history by price-to-earnings and price-to-sales metrics. He also reiterated the market's current overvaluation by measure of the equity risk premium, which is the market's assumed return over Treasury yields. Even after accounting for the high valuations of the tech sector by looking at the equity risk premium of the equal-weight S&P 500, it's still at its lowest level since the Great Financial Crisis, he said. "We compared current multiples vs. the median multiple from January 2010-present. S&P 500 P/E multiples are 9% above their median while P/Sales multiples are 23% above median," Wilson said."These broadly elevated equity multiples combined with the extremes we are seeing when looking at valuation in the context of rates via the equity risk premium enhance the case for a de-rating in equities from current levels.", Barclays' head of US equity strategy, also said this week that valuations are too high. "[We] continue to believe that equity markets are trading too rich relative to most outcomes, particularly after accounting for stickier-than-expected inflation and more hawkish expectations for the Fed rate path, which should place both earnings and valuations squarely at risk," Krishna said in a client note. "History implies that for the current level of real rates the S&P 500 multiple is ~2.5x overvalued," the chief market strategist said. But, like Subramanian, many strategists see the market recovering to somewhere near current levels by the end of 2023. Wilson's end-of-year target for the S&P 500 is 3,900, while Krishna and Kolanovic have targets of 3,725 and 4,200, respectively. The outlook for stocks worsened in February when January's inflation data came in higher than investors were expecting. Higher inflation likely means tighter monetary policy over a longer period of time, presenting more of a threat to the economy and corporate earnings. Investors are beginning to anticipate negative year-over-year earnings in the face of high rates, according to the Morgan Stanley chart below. This has happened only four times since 2000, prompting stocks to fall in each case.If earnings — and by extension valuations — do begin to crumble, Subramanian's call for a big potential downside could start to play out.Subscribe to push notifications
Please follow us on Google to support usUnited States Latest News, United States Headlines
Similar News: You can also read news stories similar to this one that we have collected from other news sources.
S&P 500, Nasdaq futures slip as yields stay high, Tesla slidesFutures tracking the S&P 500 and the Nasdaq fell on Thursday as the 10-year Treasury yield held above 4% on bets of tighter monetary policy for a longer period, while Tesla sank after it gave few details on its affordable electric vehicle.
Read more »
S&P 500, Nasdaq futures slip as yields stay high, Tesla slides By Reuters*S&P 500, NASDAQ FUTURES EXTEND SLUMP AS YIELDS STAY HIGH - $SPY $QQQ
Read more »
S&P 500, Nasdaq open lower as higher bond yields weigh on stocksU.S. stocks opened mostly lower on Thursday, with only the Dow lingering in positive territory, as inflation fears helped push the yield on the 10-year...
Read more »
Russian Bank Issues Bank Guarantee in Chinese Yuan Using Blockchain – Finance Bitcoin NewsA bank in Russia has issued the country’s first blockchain-based bank guarantee denominated in Chinese currency.
Read more »
The S&P 500 is close to breaking a level that could trigger another drop in stocksThe S&P 500 is flirting with a key resistance area that, if broken, could mean some more downside for stocks, say analysts who watch charts.
Read more »
Salesforce stock can soar 26% on 'disciplined' growth: Bank of AmericaSalesforce stock has 26% upside as Marc Benioff's company shows resolve on 'disciplined growth,' Bank of America says
Read more »