By Lewis Krauskopf

NEW YORK (Reuters – The U.S. Stocks’ fall this year puts more emphasis on equity valuations. This is because investors are evaluating whether shares that have been discounted recently are worthwhile to purchase in the face a hawkish Federal Reserve, and wide-ranging geopolitical uncertainty.

Based on the most recent data from Refinitiv, Datastream shows that the benchmark has fallen 13.5% since last year. This means that valuations are at their lowest point in over two years. The forward price to earnings ratio for the index is 17.9x, down from 21.7 at its end of 2021.

While many investors tend to ignore elevated valuations after the market’s dramatic surge from the post-COVID-19 lows in the last few years, the Fed has been quick to penalize companies that are deemed overvalued as it reverses its easy money policy which kept yields low while buoying equities.

Some investors think that stocks are more appealing to bargain hunters than they once were. However, some other investors feel that equity investments may not be affordable enough. The Fed has signaled its willingness to tighten monetary policies to reduce inflation. Bond yields spike and market volatility continues to rise due to geopolitical threats such as war in Ukraine.

J. Bryant Evans is a portfolio manager for Cozad Asset Management, Champaign, Illinois. “Stocks have been getting closer to fair value… but it’s not yet there,” Evans said. You need to take inflation, bond yields and what’s going with the GDP into consideration. They’re still not there.

Markets were shaken by wild swings in the last week following a Fed rate hike of 50 basis points. The Fed signaled that it would make similar moves at future meetings as it attempts to reduce the 40-year high annual inflation rates. This is the longest losing streak for the index since mid-2011, with five consecutive weekly declines.

If next week’s consumer price index reading surpasses the expectations, then more volatility may be on the horizon. This could potentially increase the need for Fed to tighten monetary policy.

In a note sent to clients, Keith Lerner, Truist Advisory Services’ co-chief investment officer, stated that there has been a “healthy reset” in sentiment and valuations.

Investors will need greater faith in the Fed’s ability tame inflation and not unduly harm the economy to allow stocks to rise on a sustained basis.

Though valuations have come down, S&P 500’s forward P/E stands above its long-term average of 15.5 times earnings estimates.

Graphic- U.S. stock market valuations: https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/znpnemgxyvl/chart.png

Potentially burnishing stocks’ appeal, S&P 500 companies are expected to increase earnings by about 9% this year, according to Refinitiv data, as they wrap up a better-than-expected first-quarter reporting season.

Treasuries could be able to extend the sell-off that saw Treasuries raise their benchmark 10-year yield to its highest point since 2018. This is inversely related to price movements.

Technology and high-growth industries are less attractive due to higher yields. Their cash flows tend to be more weighted and reduced when they are discounted at lower rates.

The forward P/E for the S&P 500 technology sector has declined from 28.5 times to 21.4 so far this year, according to Refinitiv Datastream data as of Friday morning.

Art Hogan is Chief Market Strategy at National Securities. He stated, “In terms of Growth Valuations, they have been hit most hard and likely the highest oversold.”

But the sector continues to trade at a nearly 20% premium to the overall S&P 500, above the 15% premium it has averaged over the broader index over the past five years.

John Lynch, Comerica’s chief investment officer (NYSE: Wealth Management), stated that if the 10-year yield is between 3% and 3.5% after having been a “fraction” of that level for a prolonged period, then “that will continue to be a burden on the P/E” and thus the discounting mechanism to the growth and technology spaces. He believes value should prevail over growth shares.

Lynch explained that Lynch believes “to a large extent” the pressure of higher yields is baked-in. Lynch said, “But it’s not going away. “I believe it will persist.”