The Bottom Is In
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Many investors continue to doubt the durability of this SPX rally. This is a natural reaction to a sharp V-shaped rebound that has left many investors stuck in cash (or worse yet, short). A fundamental analysis shows that stocks are not expensive today.
So where are we today? At the Mar 30 low, SPX had declined -10% which is considered a moderate selloff (happens roughly once a year). Beneath the surface, more than half of the stocks in the entire market had dropped 20% or more, including all members of Mag 7. The market was appropriately reflecting dire risks at the time.
The SPX Price-to-Earnings ratio, or the price paid for every dollar of profit, had declined -18% from its peak (chart below). This typically only happens during a recession or a Fed that is hiking interest rates. Neither were happening.
Meanwhile, energy stocks have peaked and are falling back down to earth, along with underlying oil prices. The energy shock and corresponding tightening of financial conditions is now loosening.
There's a reason we use fundamentals and technicals together. Prices change faster than narratives. Even as negativity was pervasive amongst investors, the technical signals told us that change was afoot.
Markets always discount the future ahead. As such, we think much of the geopolitical risk, private credit risk, and AI disruption have been discounted already. Unless a new reason arises for recession, the bottom appears to be “in” for this cycle.
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