The stock market hasn’t looked this cheap in nearly two years


U.S. stocks appear cheaper than they have since the early days of the Covid-19 pandemic—but such bargains won’t be enough to power the next leg of the bull market, investors say.

Although major indexes are still hovering near record levels, a punishing early-year selloff in technology and other growth stocks has brought valuations down closer to historical norms. Stocks resumed their declines this week, with the S&P 500 sliding 3.7% across Thursday and Friday after a hotter-than-expected inflation report bolstered the case for tighter monetary policy from the Federal Reserve.

The U.S. stock benchmark traded late last month at as low as 19.3 times projected earnings over the next 12 months, according to FactSet, falling below 20 for the first time since April 2020. That was down from the 21.5 multiple at which the benchmark entered the year but still above the five-year average of 18.9.

Worries about how quickly the central bank will raise interest rates and how the economy will respond have made investors cautious about calling a bottom to the selloff. Many expect that companies will need to deliver robust profit growth for stocks to embark upon a sustained advance.

“Now that we’re talking about higher interest rates, future earnings aren’t as concrete or as clear,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “So people aren’t paying that elevated multiple.”

The stock market had seemed on the cusp of finding its footing in the days before Thursday’s inflation report sapped its momentum—and potentially ratcheted up pressure on the Fed to raise interest rates even faster than expected. The consumer-price data showed inflation accelerated in January to a 7.5% annual rate, a 40-year high.

Statements by the White House on Friday that Russia could invade Ukraine at any time exacerbated anxieties in the market.

The S&P 500 declined 1.8% for the week, while the tech-heavy Nasdaq Composite slumped 2.2%. The indexes are down 7.3% and 12%, respectively, this year.

Expensive stocks like those in the technology sector have suffered some of the worst of the recent pain, while investors have embraced cheap stocks.

The year’s top-performing S&P 500 sectors are those that ended 2021 with the lowest price-to-earnings ratios. The energy sector traded on Dec. 31 at 11 times its projected earnings and now is up 26% year-to-date. The financials segment, which entered the year at 14.7 times earnings, is the only other sector in positive territory for the year with a gain of 2.5%.

Stocks like Exxon Mobil Corp. and Bank of America Corp. are outperforming shares of many of the growth companies that propelled the market higher in recent years.

Exxon is up 31% this year, while Bank of America has risen 7.7%. Facebook parent Meta Platforms Inc. is down 35% after disappointing investors last week with a decline in profit and gloomy forecast. Tesla Inc. has fallen 19%, and Microsoft Corp. is off 12%.

Bond yields have jumped, with the yield on the benchmark 10-year U.S. Treasury note on Thursday hitting 2% for the first time since 2019.

Rising yields weigh on stock valuations, especially in pricey areas like the tech sector, because they lower the value investors place on companies’ future cash flows while making the fixed payments of bonds more attractive. Stocks can still advance but may be more dependent on rising profits to justify their gains. Higher yields also help government bonds compete with companies’ dividends for the attention of income-focused investors. The S&P 500’s dividend yield is 1.29%.

“While we’re pleased to see that valuations have come down a bit, that’s not the key driver that we’re counting on to drive the markets higher,” said Saira Malik, chief investment officer at Nuveen. “We’re counting on earnings.”

Analysts predict that profits from companies in the S&P 500 will rise 8.5% in 2022, FactSet data show, a slowdown from the 47% growth estimated for 2021.

Stocks grew increasingly expensive in 2020 when share prices rocketed higher before earnings projections caught up. The extensive monetary and fiscal stimulus put in place to support the economy during the pandemic pushed investors into risky assets and drove stock indexes to records. A surge in corporate profits followed.

So far this year, the Russell 1000 Value index is outperforming the Russell 1000 Growth index by 9.5 percentage points. That is the largest lead by value stocks in any year through Feb. 11 in data going back to 1994, according to Dow Jones Market Data.

The value index is down 2.5% for the year, while the growth index has fallen 12%.

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint.
our App Now!!

Source link

0 0 votes
Article Rating
Notify of
Inline Feedbacks
View all comments