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S&P 500 May Fall Another 15%

By Michael KramerMarket OverviewJun 24, 2022 05:36AM ET
www.investing.com/analysis/sp-500-may-fall-another-15-200626235
S&P 500 May Fall Another 15%
By Michael Kramer   |  Jun 24, 2022 05:36AM ET
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This article was written exclusively for Investing.com

While stocks are down sharply on the year and cheaper in price, markets are still not reasonable from a valuation perspective. The S&P 500 is still trading at an elevated PE ratio when considering the Fed's agenda to tighten monetary policy and the rising risk of a recession.

That valuation will likely drive the market down even more because historically, when the market has this many questions, it tends to bottom at a lower PE ratio. That means the current PE ratio of 16.0 is probably too high for the time being because that has been around the historical average for the last 20 years.

At least in recent times, the S&P 500 has seen its PE ratio bottom closer to 14 times earnings. That suggests there is still a decline for the broader markets as investors wrestle with the economy's direction. Additionally, as the Fed raises rates and financial conditions tighten, that will help reduce liquidity in markets which will also help to compress that PE multiple further. 

Historically going back to 2000, the average PE ratio for the next four quarters has been around 16.8. Following the 2000 stock market bubble, the S&P 500 PE ratio fell to about 14 by 2002, and that low held for several years until late 2008 when it dropped below 14 following the collapse of Lehman and the financial crisis. The 14 region also helped be a support area for the markets again in late 2018 and early 2020. 

On top of the rising risk of a potential recession, tightening financial conditions will also help compress the PE multiple further. When the Chicago Fed's national financial conditions index rises, PE falls. Based on the current path of financial conditions and the Fed's desire to tighten financial conditions and potentially have them become restrictive on the economy, those conditions need to tighten further. That means the Chicago Fed NFCI will probably rise above 0, which in turn would indicate that the PE ratio for the S&P 500 needs to fall further. 

If that PE ratio does fall to around 14, it could mean the S&P 500 has approximately 15% or so to fall. Assuming that earnings estimates remain unchanged at $236.52 over the next four quarters, the value of the S&P 500 would drop to around 3,300. 

A drop in the PE ratio to around 14 also discounts a potential decline in earnings estimates. Should the S&P 500 drop to about 3,300, for the PE ratio to move back to the historical average of 16.8 would imply that earnings drop to $196.42 per share or about 17%. 

A decline in earnings estimates seems like that needs to happen because higher interest rates and tightening financial conditions will not only cool inflation but also help bring down earnings estimates. 

Whether or not the S&P 500 makes it to 3,300 or perhaps goes even further will be entirely dependent on the course of the Fed rate hiking cycle and its potential impacts on the economy. If the Fed shows signs of backing off, the market will likely resolve its issues sooner and provide a much-needed relief rally. 

 
S&P 500 May Fall Another 15%
 

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S&P 500 May Fall Another 15%

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Comments (34)
Billy Bilnaad
Billy Bilnaad Jun 27, 2022 6:54PM ET
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Biggest bear out there
Al Ose
Al Ose Jun 27, 2022 7:54AM ET
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My amateur guess is bottom comes late feb/early march 2023. That will really be the heart of a contined earnings hit. The fed cannot nor should they care if the stock market gets whacked. Thats part of remedy to inflation
Son Yay
Son Yay Jun 27, 2022 7:54AM ET
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Agree, except Fed does care about their social acquaintances and want to he invited to their Wall Street master's yachts and Chateaus. It was until recently those working at the Fed could own and trade stocks, huge conflicts of interests that even Nancy Pelosi frowned upon.
Al Ose
Al Ose Jun 27, 2022 7:54AM ET
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My amateur guess is bottom comes late feb/early march 2023. That will really be the heart of Of contined earnings hit. The fed cannot nor should they care if the stock market gets whacked. Thats part of remedy to inflation problen to be honest
Kerry Ditto
Kerry Ditto Jun 26, 2022 7:47PM ET
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S&p 500 may fall additional 30%
Larry DeAngelis
Larry DeAngelis Jun 26, 2022 2:45PM ET
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He has been bearish and has been correct this year! All you buy the dipshits need to understand stock market pricing is based upon earnings and dividends. Not hope!!!
Billy Bilnaad
Billy Bilnaad Jun 26, 2022 2:45PM ET
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Go figure. If you keep saying bearish stuff all the time like this guys did you’re eventually be right. Dont need to be a genius for that.
Samer Diab
Samer Diab Jun 26, 2022 9:55AM ET
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we have already reached the bottom.
apostolos sideris
apostolos sideris Jun 26, 2022 9:36AM ET
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simple and clear!thank you.
CS Greer
CSGreer Jun 25, 2022 7:30AM ET
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With all due respect, 2008 had nothing to do with P/E ratios, it was all about sub-prime mortgages.
CS Greer
CSGreer Jun 25, 2022 7:26AM ET
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Nah.. more like 20%-22%
Todd Holaday
JustWilliam Jun 24, 2022 7:29PM ET
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If Investing.com wants to be taken seriously it needs to either moderate the comment section or remove ot entirely. This author’s work deserves more serious debate.
CS Greer
CSGreer Jun 24, 2022 7:29PM ET
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Why don't you just avoid the comment section since it bothers you? You do know the comments are optional reading too, right?
 
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