After A 10 Percent Correction, 10 Thoughts About Where We Are Heading

5. Corporate earnings continue to improve. With more than 80 percent of S&P 500 companies reporting results, earnings-per-share are up about 15 percent and sales are up in the high single-digits.² At this point, 81 percent of companies are beating earnings expectations, the highest level in eight years.²

6. The selloff has modestly reduced equity valuations. The S&P 500 forward price-to-earnings ratio had climbed as a high as 18.4 when the market peaked in mid-January.¹ As of Friday’s close, it had fallen to 16.3, near where it was two years ago when markets experienced the early-2016 correction.¹

7. Despite additional declines late last week, market technicals improved. After the Monday/Tuesday selloff, markets retraced before plunging again on Thursday into Friday morning.¹ Although price levels fell further late in the week than they did earlier, technical conditions were stronger: Volume was lower, we saw fewer 52-week lows and a fewer number of stocks declined.¹ We think these are positive signs.

8. Double-digit market corrections are a normal part of bull markets. The S&P 500 has more than quadrupled in price since it bottomed at 666 in March 2009.¹ During that same time, we have seen five different double-digit corrections: 17 percent in 2010, 22 percent in 2011, 10 percent in 2014, 16 percent in 2016 and (as of now) 12 percent in 2018.¹

9. We believe this correction is close to its low in price terms, but markets probably need time to digest and repair. In other words, we think investors should respect this correction, but not fear it. The economy is solid, earnings are improving, financial conditions are sound, and corporate balance sheets look healthy. We believe these fundamental factors should eventually drive stock prices higher.

10. We still believe stock prices will rise for all of 2018. Our fair-value target for the S&P 500 this year has been and remains around 2,800. That would imply around a 7 percent total return for the year.¹ We also believe that valuation levels will be lower by the end of the year compared to the beginning due to higher interest rates and inflation.

This Correction May Continue, But Positive Signals Remain Encouraging

For much of the past year, we have been cautioning that market volatility was too low and a consolidation or correction could come at any time. It appears it finally happened with a bang, driven primarily by inflationary pressures and a spike in bond yields.

While some of the associated technical market factors may prove to be transitory, investors and financial markets may have to adjust to a new reality of higher interest rates and rising inflation. These developments are likely to cause additional near-term volatility in the weeks ahead, and we would not be surprised to see more sharp back-and-forth movements in stock prices.

The good news, however, is that we see no real signs that the economy is headed for recession or that earnings are poised to retract. Without that happening, it is hard to see how a lasting bear phase for stocks could emerge.