Verrone at Strategas agrees, saying six of the nine indicators he watches for a market low have yet to signal the all-clear. For instance, the Cboe Volatility Index, or VIX, has not breached 40 during the selloff.
Morgan Stanley’s Wilson says stocks have been trading “terribly” since the fall. While analyst estimates for S&P 500 earnings have stayed robust, Wilson says the recent equity rout reflects investor concerns that profit growth may have peaked in the first quarter amid inflation and lingering recession risks.
He sees the S&P 500 falling to at least 3,800, and as low as 3,460, or almost 700 points below Monday’s close.
“Stocks always lead the news,” Wilson wrote in a note. “First were the high-multiple stocks getting kicked around in November and December as they sniffed out the Fed’s aggressive pivot on policy in January. Now, they are figuring out that 1Q may be the last good quarter of earnings as higher costs and increased recession risks weigh on future growth.”
“Our longer-term equity indicators are not yet oversold enough to have a high conviction ‘buy’ call,” he wrote in a note. “We also believe managers have started to re-price stocks using recession-like multiples. If that is the case, we are still over-valued.”
While every recession is different, using 2020’s bottom as a guide shows the S&P 500 could drop another 22%, all else equal. Back then, the index’s price-earnings ratio touched 13.4, compared with a current multiple of 17.2.
A separate analysis by Nicholas Colas, co-founder of DataTrek Research, suggests that if the market discounts a 50% chance of a “garden-variety” recession, the S&P would only be considered “cheap” were it to fall another 20% from current levels.
“We still do not believe U.S./global equities have bottomed and continue to recommend caution,” Colas wrote in a note. “The only good thing about a bear market is that there are excellent returns available when they end. Until that point becomes clearer, however, risk is just another four-letter word.”
This article was provided by Bloomberg News.