This year’s market declines have largely been a valuation “correction.” The price-to-earnings ratio (P/E) of the S&P 500 Index has declined about 25%, and stock prices are down more than 20%. We could see another decline phase based on company fundamentals (profits and losses).
What will company earnings be going forward? Projections for S&P 500 future earnings average $235/share. This will be more difficult with the Fed slowing the economy. Analysts have recently begun lowering estimates while ignoring the impact of a strong Dollar. Roughly 40% of S&P 500 company earnings are from overseas, which get converted into Dollars for reporting purposes. When foreign earnings are converted to Dollars this season, it could add to relative earnings declines and, therefore stock prices.
It is important for investors to know that historically the P/E ratio bottoms well before earnings do, roughly 6 months earlier. In fact, in the past 100 years of market cycles, the P/E ratio has already rallied 20% by the time actual earnings bottom out. The market is a forward-looking mechanism – one that discounts information more efficiently than any person or computer can. Waiting until economic data and earnings data reflect the improvement in underlying fundamentals to investing means missing out on the best returns.
We should be only a few Fed meetings away from a pause in rate increases, so the low point for the market could be sometime over the next six months. It is a constantly moving target, but that is our best guess given what we know today. No one ever said this was easy, which is why successful investors often partner with an advisor. We remain disciplined while investors may get emotional. We are more likely to get aggressive at the right time and take advantage of these short-lived low stock prices.
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We encourage our clients to continue living life without stressing over market conditions. Allowing us to focus on the markets and our clients to focus on enjoying life!