The recent performance of the stock market has raised concern as the selloff gathers speed. Last week, the S&P 500 index saw a 2.5% drop, while the Nasdaq Composite declined by 2.6% and the Dow Jones Industrial Average experienced a 2.1% decrease. These numbers indicate that both the S&P 500 and Nasdaq are now in correction territory, having fallen 10% or more from their year’s highs.
The S&P 500 had made several attempts to rally in recent months, but these bounces have consistently fallen short. Some of these so-called mini-rallies lasted for weeks, only to end at lower levels than their predecessors. This trend has persisted, suggesting a lack of confidence in the economy, corporate earnings, and overall stock valuations.
According to Jay Woods, chief global strategist at Freedom Capital Markets, sentiment has changed as breakdowns become more evident. This shift in sentiment has given rise to concerns among investors.
Interestingly, positive news seems to have a negative impact on the market once again. Though the US economy grew by an impressive 4.9% in the third quarter, this figure has reinforced the Federal Reserve’s commitment to maintaining high interest rates as a means of controlling inflation and economic growth. While a rate hike is not expected during the upcoming central bank meeting this week, investors will closely monitor any indications regarding the duration of high interest rates.
In summary, the current state of the stock market suggests a bearish sentiment and a lack of confidence in the economy and stock valuations. Investors are eagerly awaiting insights from the upcoming central bank meeting to gauge future market movements.
Economic and Profit Growth Could Slow as Higher Rates Persist
The prospect of economic and profit growth slowing down looms as higher rates persist. Tighter policy measures take a toll on the economy with a delayed effect, leading investors and companies to question positive news stemming from corporate earnings. Meta Platforms (META), for example, cautioned during its third-quarter earnings call that advertising sales might decelerate, despite easily surpassing forecasts for earnings and sales. Consequently, the company’s stock experienced a decline of 3.7%.
It’s not just Meta that faces this predicament. According to Evercore ISI, S&P 500 companies that have outperformed third-quarter sales and earnings projections only saw an average uptick of 0.5% following their reports. This figure is only half the five-year average of 1%. The lackluster market responses to earnings reflect an ongoing issue of overpricing. The S&P 500 currently trades at approximately 17 times the anticipated earnings per share over the next 12 months. Considering that higher yields diminish the future worth of profits, this valuation multiple appears elevated. Evercore suggests that when the 10-year yield is as high as its current 4.84%, the S&P 500’s multiple should typically hover around the low teens.
Steve Sosnick, Chief Strategist at Interactive Brokers, comments that the yield is seemingly stuck at current levels in the short term. As investors, it would be preferable for stocks to follow suit. While reaching new highs may be unlikely, it is still a better outcome than plummeting to new lows.
