STOCKS HAVE CRASHED. THEY’RE STILL TOO EXPENSIVE

U.S. equities have made their worst start to a year in a half-century, Wall Street Journal analyst Karen Angley noted in a 13 May commentary.  They still might be overpriced, she wrote.

On 12 May, far into the stock market’s rout, the Standard & Poor’s 500 index was still trading 16.8 times its listed companies’ projected earnings over the next 12 months. The 20-year average has been 15.7.

The S&P is down almost 20 percent this year, nearing a bear market and turning in its worst year-to-date performance since 1970, according to Dow Jones Market Data.

The U.S. Federal Reserve’s rising interest rates are likely to crimp companies’ cash flows, which would shrink earnings.

By the time the Fed is done raising rates, the S&P earnings multiple will be about 15, Michael Mullaney, research director at Boston Partners, has predicted.

If the Fed’s campaign of rising rates sparks a recession, the ratio could fall to 13 or 14, he said in a comment Angley quoted.

Citigroup’s analysts recently reported that U.S. stocks entered a bubble in October 2020 and the bubble is now losing air.

The comment poses an analogy to the dot-com bubble in the 1990s, when the 12-month multiple shot to 26.2 in March 2000. Two years later, the figure was 14.2. In 2008, in the rubble of the Great Recession, the multiple plunged to 8.8.

As an example of the market’s exuberance, Tesla’s shares began trading this year at 120 times projected 12-month earnings; earlier this month, that figure had been more than halved to 54. ExxonMobil’s multiple has dipped from 10.5 to 9.4 this year.

Although corporate earnings have gained 9.1 percent in this year’s first quarter over last year’s, “there are reasons for concern,” Angley warned.

In earnings calls, “companies have been mentioning variations of ‘weak demand’ at the highest rate since 2020” during the COVID era, as reported by Bank of America Global Research, she said.

“If earnings were to disappoint,” she added, “that would make the stock market’s valuation even more expensive than they already appear – absent another move lower in share prices.”

TREND FORECAST: U.S. stock markets will continue to decline in value until the excessive valuations injected into the market by the Fed’s bond-buying and cheap money, retail traders biding their time by gambling on meme stocks, and faith that the market is divorced from reality’s bad news are completely drained out of it.

When the Fed’s key interest rate reaches or surpasses 1.5 percent, markets will sharply fall. When interest rates climb above 3 percent markets and the economy will crash. Therefore, when both start sharply declining, under pressure from Washington, the Fed may put a pause on raising interest rates so the economy appears strong before the 2024 Presidential election.