Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Bargain hunters study stock valuations after big declines

EconomyJan 28, 2022 11:56AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar/File Photo

By Lewis Krauskopf

NEW YORK (Reuters) - A steep slide in U.S. stocks has investors gauging equity valuations to determine whether now is the time to scoop up shares at a bargain.

The S&P 500 has dropped over 9% so far in 2022, while the tech-heavy Nasdaq stands in correction territory after a nearly 15% fall. The market sank again this week after the Federal Reserve signaled it is likely to raise U.S. interest rates in March before shrinking its balance sheet later in the year.

Buying after pullbacks paid off for many investors over the last two years, when the Fed’s ultra-easy monetary policies during the pandemic buoyed stocks from one record high to the next.

With the market now pricing in almost five rate hikes by the end of 2022, that calculus has changed dramatically.

"The convergence of monetary and fiscal policy, which was historically dovish and ample, now is changing course and the equity markets as well as other risk markets are slowly coming to terms with that sobering reality,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors.

The slide in stocks has brought down the valuation of the overall S&P 500, which at the end of 2021 stood not far from its highest level in two decades. The index now trades at 19.5 forward 12 months earnings, compared to 22 times earnings in late December and its five-year average of 18.5, according to Refinitiv IBES.

The market's fall hadn’t been precipitous enough for Barclays (LON:BARC) strategists, who early this week declared in a note it was still "too early to buy the dip." An analysis of pre-pandemic equity valuations showed the index could decline another roughly 8% from the 4,410.13 level where it closed on Monday, Barclays strategists said in a report. The S&P 500 was recently at 4,330, about 2% below Monday's level.

Other valuation metrics are more favorable to stocks. A look at the equity risk premium – or the extra return investors receive for holding stocks over risk-free government bonds – favors equities over the next year, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.

When that premium historically has been at the level it reached on Wednesday, the S&P 500 has beaten the one-year return for the 10-year Treasury note by an average of 11.8%, Lerner said. The yield on the benchmark 10-year Treasury has climbed about 30 basis points this year to 1.81% but remains low by historical standards.

"At least right now, even though there could be more volatility, until and unless the Fed actually makes a mistake or there is actually a recession, you still want to stick with stocks over bonds,” said Sameer Samana, senior global market strategist at the Wells Fargo (NYSE:WFC) Investment Institute.

The strength of fourth-quarter corporate results, which continue to roll in with S&P 500 earnings season not yet at the halfway point, could bolster the case for investors looking to buy at a discount.

With S&P 500 earnings expected to grow 8.4% in 2022, the backdrop for stocks appears to be a solid one. However, skittish investors have punished companies such as Netflix (NASDAQ:NFLX), JPMorgan (NYSE:JPM) and Tesla (NASDAQ:TSLA) delivering less than stellar news in recent weeks, adding to the uneasy mood. Another large batch of reports is due next week, including from heavyweights Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).

“Heading into 2022, our view was that equities could earn their way out of rising yields and lower P/E multiples. Our new base case for six hikes this year poses challenges to that bullish outlook,” analysts at BNP Paribas (OTC:BNPQY) wrote.

Nevertheless, the bank said investors should “stay the course” in equities, as the “outlook for above-trend growth and inflation still translates to above consensus double-digit earnings growth for 2022."

Bargain hunters study stock valuations after big declines
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Church of Bear Market
Church of Bear Market Jan 28, 2022 3:20PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Fed stopped pumping money to the system. We will return to normal ie. Tesla $40 etc…
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email