The stock market hasn’t looked so cheap in almost two years


US stocks look cheaper than they have since the early days of the Covid-19 pandemic, but such bargains won’t be enough to fuel the next leg of the bull market, investors say.

Although major indexes are still hovering near record highs, a sharp selloff early in the year in technology and other growth stocks has brought valuations closer to historical norms. Stocks resumed their decline this week, with the S&P 500 slipping 3.7% on Thursday and Friday after a hotter-than-expected inflation report bolstered the case for tighter monetary policy. Federal Reserve.

The benchmark U.S. equity index traded late last month as low as 19.3 times expected earnings over the next 12 months, according to FactSet, falling below 20 for the first time. since April 2020. That was down from the 21.5 multiple at which the benchmark entered the year, but still above the five-year average of 18.9.

Concerns over how quickly the central bank will raise interest rates and how the economy will react have made investors cautious about calling a bottom to sell off. Many expect companies to need strong earnings growth for stocks to embark on a sustained run.

“Now that we’re talking about higher interest rates, future earnings aren’t as concrete or as clear cut,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “So people don’t pay that high multiple.”

The stock market had looked poised to find its footing in the days leading up to Thursday’s inflation report which sapped its momentum and potentially increased pressure on the Fed to raise interest rates. even faster than expected. Consumer price data showed inflation accelerating in January to an annual rate of 7.5%, a 40-year high.

Statements from the White House on Friday that Russia could invade Ukraine at any time heightened concerns in the market.

The S&P 500 was down 1.8% for the week, while the tech-heavy Nasdaq Composite fell 2.2%. The indices are down 7.3% and 12%, respectively, this year.

Expensive stocks like those in the tech sector have suffered among the worst of the recent crisis, while investors have embraced cheap stocks.

The best performing S&P 500 sectors of the year are those that ended 2021 with the lowest price-to-earnings ratios. The energy sector traded on Dec. 31 at 11 times its expected earnings and is now up 26% year-to-date. The financial services segment, which started the year at 14.7 times earnings, was the only other sector in positive territory for the year with a 2.5% gain.

Stocks like Exxon Mobil Corp.

and Bank of America Corp.

outperform the stocks of many growth companies that have propelled the market higher in recent years.

Exxon is up 31% this year, while Bank of America is up 7.7%. Metaplatforms related to Facebook Inc.

is down 35% after disappointing investors last week with lower earnings and bleak forecasts. You’re here Inc.

fell 19%, and Microsoft Corp.

is down 12%.

Bank of America’s stock is up 7.7% this year.


Photo:

Victor J. Blue/Bloomberg News

Bond yields jumped, with the yield on the benchmark 10-year U.S. Treasury hitting 2% on Thursday for the first time since 2019.

Rising yields are weighing on stock market valuations, especially in expensive areas like the tech sector, as they reduce the value investors place on companies’ future cash flows while making fixed bond payments more attractive. Stocks may still rise, but may depend more on rising earnings to justify their gains. Higher yields also help government bonds compete with corporate dividends for the attention of income-oriented investors. The dividend yield of the S&P 500 is 1.29%.

The stock market has entered correction territory as investors reassess the value of the market after the Federal Reserve announced its intention to raise interest rates. The WSJ’s Dion Rabouin explains. Illustration: David Croc

“While we are pleased to see that valuations have fallen slightly, this is not the main driver we are counting on to drive the markets higher,” said Saira Malik, chief investment officer at Nuveen. “We rely on revenue.”

Analysts expect earnings for S&P 500 companies to rise 8.5% in 2022, according to FactSet data, a slowdown from the 47% growth estimated for 2021.

Stocks became increasingly expensive in 2020 as stock prices soared before earnings projections caught up. Extensive monetary and fiscal stimulus put in place to support the economy during the pandemic has pushed investors into risky assets and pushed stock indices to record highs. A surge in corporate profits followed.

So far this year, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index by 9.5 percentage points. This is the biggest advance for value stocks in a year through Feb. 11 in data dating back to 1994, according to Dow Jones Market Data.

The value index is down 2.5% over the year, while the growth index fell 12%.

The stock market hasn't looked so cheap in almost two years

Exxon stock is up 31% this year,


Photo:

News by Luke MacGregor/Bloomberg

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Write to Karen Langley at karen.langley@wsj.com

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