The stock market hasn’t been this cheap in almost two years

Investors say US stocks look cheaper than they did in the early days of the Covid-19 pandemic – but such bargains won’t be enough to power the next phase of the bull market.

Although the major indexes are still hovering near record levels, the penalty-worthy sell-off at the start of the year in technology and other growth stocks has brought valuations close to historical norms. Shares continued their decline this week, with the S&P 500 index sliding 3.7% on Thursday and Friday. a hotter-than-expected inflation report strengthens the case for tighter monetary policy from the Federal Reserve.

According to FactSet, the benchmark US stocks traded late last month as low as 19.3 times expected earnings over the next 12 months, falling below 20 for the first time since April 2020. The number This is down from the 21.5x the benchmark included but still well above the five-year average of 18.9.

Worries about how quickly the central bank will raise interest rates and how the economy will react have made investors cautious about placing a bottom for the sell-off. Many expect that companies will need to deliver strong earnings growth to stocks in order to initiate sustained growth.

“Now that we’re talking about higher interest rates, future earnings are not specific or clear,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “So people don’t pay such high multiples.”

Stock market Days before Thursday’s inflation report waning its momentum appears to have peaked – and is likely to put pressure on the Fed to raise rates even faster than expected. Consumer price data showed inflation accelerated in January to an annual rate of 7.5%, a 40-year high.

The White House statement on Friday that Russia may invade Ukraine at any time exacerbating anxieties in the market.

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

Expensive stocks like those in the tech sector have suffered some of the worst in recent declines, while investors embrace cheap stocks.

The best performing S&P 500 industries for the year were those that ended 2021 with the lowest price-to-earnings ratios. The energy sector traded on December 31 at 11 times expected earnings and is now up 26% year-over-year. The financials segment, which entered the year with earnings of 14.7 times, was the only other sector to outperform the year with a 2.5% gain.

Stocks like

Exxon Mobil Corp.


Bank of America Corp.

are outperforming the stocks of many of the growth companies that have driven the market higher in recent years.

Exxon is up 31% this year, while Bank of America is up 7.7%.



Meta . Platform Inc.

35% off after disappointed investors last week with a drop in profits and bleak forecasts.

Tesla Inc.

fell 19%, and

Microsoft Corp.

is down 12%.

Shares of Bank of America are up 7.7% this year.


Victor J. Blue / Bloomberg News

Bond yields jumped, with yields on benchmark 10-year US Treasuries on Thursday reach 2% for the first time since 2019.

Rising yields affect stock valuations, especially in expensive areas like the technology sector, because they reduce the value investors place on future cash flows of companies in the future. making the bond’s fixed payments more attractive. Stocks can still go up in price but may depend more on rising profits to justify their returns. Higher yields also help government bonds compete with corporate dividends for the attention of income-focused investors. The S&P 500 dividend yield is 1.29%.

The stock market entered a correction as investors reassessed market values ​​after the Federal Reserve signaled plans to raise interest rates. WSJ’s Dion Rabouin explains. Illustrated by: David Fang

“While we are pleased to see that valuations have dropped a bit, it is not the main driver we believe is driving the market higher,” said Saira Malik, Chief Investment Officer at Nuveen. “. “We’re relying on income.”

Analysts expect earnings from S&P 500 companies to grow 8.5% in 2022, FactSet data showed, slowing growth from the 47% estimated gain for 2021.

Stocks are getting more expensive in 2020 as share prices skyrocket before earnings forecasts catch up. Widespread monetary and fiscal stimulus measures put in place to support the economy during the pandemic have pushed investors into risk assets and sent stock indexes to record highs. Soaring corporate profits followed.

So far this year, the Russell 1000 Value index is outperforming the Russell 1000 Growth index by 9.5 percentage points. That was the largest lead in value stocks in any year through February 11 in data going back to 1994, according to Dow Jones Market Data.

The value index fell 2.5% on the year, while the growth index fell 12%.


Shares of Exxon are up 31% this year,


Luke MacGregor / Bloomberg News


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