Even after sell-off, stocks are not cheap based on shaky 2023 earnings estimates
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Futures are rising and Hong Kong has been rallying a lot due to signs that China’s reopening is going on. This is good news. However, if we want the market to reach a bottom, more positive news needs to be provided on other macro issues such as inflation and Ukraine/Russia. The most important economic data point of the week will be Friday’s report on the consumer price index. Instead of wondering “Is Friday the bottom?”, consider asking: Instead of asking “Is this the bottom?” you could ask “How many upside possibilities are left?” Investors now value stocks based on 2023 earnings forecasts. Another 10% increase in earnings is expected next year, and at current estimates the S & P 500 is valued at roughly 17 times those 2023 estimates. That is about an average multiple for the S & P, not too hot or too cold. In other words, the S & P is not particularly cheap or expensive, but it still may not be compelling enough to elicit more buying, given that no one knows what the inflation pictures looks like. Do we have faith in the estimations? That uncertainty makes 2023’s estimates seem very suspect. Much of the nearly 10% increase in the S & P 500 since the May 20 intraday bottom is based on the idea that the Federal Reserve may not be as aggressive in the second half of the year. The chances of this happening are reduced by Friday’s job report. Even if true, it is clearly priced in today’s market. Sam Stovall, CFRA’s chief economist said that Friday’s fall was an indication that trends are not always our friend in the market. It is amazing how uniform the sector rotation was this year across all geographic groups. Stovall notes the defensive/inflation-hedge groups (consumer staples, energy, materials, and utilities) have outperformed, while the high P/E growth groups(communication services, consumer discretionary, industrials, and information technology) have been the underperformers. Stovall explained that sector rotations have been consistent in all regions (U.S.A. Canada, Europe and Asia), regardless of their size (large- to mid-sized or small-caps).
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