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Despite its 19% drop and positive EPS growth last year, the S&P 500 still screens as statistically expensive vs. history on 17 out of 20 of the measures Bank of America tracks.
Prior troughs saw the S&P trade below its average fwd P/E, trailing normalized PE, and median fwd P/E measures, but it trades above average on all three today.
Where stocks traded cheap relative to bonds over the last 10+ years, the income differential now indicates 30% downside risk to stocks or 30% upside risk to bonds to get back to historical averages.
Macro Chart In Focus
Analyst Team Note:
“The Fed has calculated what forward guidance and their balance sheet policy mean for the Fed funds rate, and their estimates show that the proxy Fed funds rate, which also includes forward guidance and the Fed balance sheet, is significantly higher. Specifically, these Fed estimates show that monetary policy is much tighter with the proxy Fed funds rate at 6% rather than the official 4%. The bottom line for markets is that the true stance of monetary policy is tighter at 6% than the Fed funds rate at 4%.
In other words, comparisons with history and discussions of how restrictive monetary policy should not only look at the level of the Fed funds rate but also include the new tools that the FOMC is using (i.e. QT) today to cool the economy down.” - Apollo Global Management
Fuel oil -16.6%, biggest decline since February 1990
Household furnishings +0.2%
Used cars -2.5%, sixth-straight decline
Apparel +0.5%, most since June
Airfares -3.1%, biggest drop since August
Medical care services +0.1%, first rise in three months
Chart That Caught Our Eye
Analyst Team Note:
ERP always rises significantly when a recession arrives, regardless of whatever level you are starting out.
Per Morgan Stanley, if the ERP rises by 250bps in a recession, and the 10-year UST yield subsequently declines to 2.75%, the P/E would fall to 13.2x, 22% below current levels. EPS forecasts will likely be lower too if/when this happens, which means stock prices could be down even more than 22% at the lows.
Sentiment Check
We want to take a moment to thank Interactive Brokers for being one of our Channel’s trusted Partners and to inform my audience of the special features they have given that our online friends here closely follow Chinese Internet stocks (BABA/Tencent).
Much of Larry’s audience is concerned about the US ADR issue of Chinese Stocks being delisted.
