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The Standard & Poor’s 500 stock index traded in late January as low as 19.3 times expected earnings over the next 12 months, its first dip below 20 since April 2020, according to data service FactSet.
The index entered 2022 at a 21.5 multiple and still remains above the five-year average of 18.9.
As of 12 February, the S&P was off 2.2 percent for the year.
Investors will need to see “robust profit growth” to reignite a bull market, The Wall Street Journal said, which will be a challenge during a time of rampant inflation and rising interest rates.
Markets also are jittery about the prospects of war in Ukraine, the WSJ noted.
“Now that we’re talking about higher interest rates, future earnings aren’t as concrete or as clear, so people aren’t paying that elevated multiple,” Megan Horneman, chief investment officer at Verdence Capital Advisors, told the WSJ.
The S&P’s best-performing sectors this year have been those that closed 2021 with the lowest price-to-earnings ratios.
Energy stocks were trading at 11 times earnings at the end of the year and are up 26 percent in 2022; financials, the only other sector in positive territory this year, ended last year at 14.7 times earnings and have eked out a 2.2-percent gain.
Exxon’s share price has risen 31 percent this year and Bank of America’s price has added 7.7 percent.
In contrast, Microsoft has shed 12 percent, Tesla has given up 19 percent, and Meta has plummeted 35 percent.
On 10 February, treasury bond yields broke up through 2 percent for the first time since 2019.
Rising yields weaken share prices, especially for tech stocks, because investors expect higher bond rates to lower companies’ future cash flows.
S&P companies’ profits will grow by 8.8 percent this year, analysts told the WSJ, compared with a record 47 percent in 2021 that was driven in part by federal stimulus payments, grants, and loan guarantees.
TREND FORECAST: We repeat our long-standing forecast that when Fed rates break above 1.5 percent to 2 percent, the equity and housing markets will sharply contract and the U.S. economy will lurch toward recession.
As inflation and interest rates rise, the U.S. debt burden will hobble GDP growth, public spending, and devalue the dollar.
The U.S. national debt has topped $30 trillion, as we reported in “U.S. Public Debt Tops $30 Trillion. Who Cares?” (8 Feb 2022), and consumer debt has now reached $15.6 trillion, having added $1 trillion in 2021 alone. Thus, the higher interest rates rise the more it will cost to service the public debt and private adjustable debt.
As inflation and rising interest rates both rise, consumer spending—which historically accounts for as much as 70 percent of the U.S. GDP—will slow, adding to pressures pushing the country toward recession.