U.S. stocks are off to their worst start to a year in more than a half-century. By some measures, they still look expensive.
Wall Street often uses the ratio of a company’s share price to its earnings as a measuring stick for whether a stock appears cheap or pricey. By that metric, the market as a whole had been unusually expensive for much of the past two years, a period when especially easy monetary policy turbocharged the popular view that low interest rates gave investors few alternatives to stocks.
Even though it has fallen 16% to start 2022, the S&P 500 traded late this week at 16.8 times its projected earnings over the next 12 months, according to
That is still above the average multiple of 15.7 over the past 20 years, but down from a recent peak of 24.1 in September 2020.
Worries about inflation and the path of the Federal Reserve’s interest rate increases have spurred the recent turmoil in markets and provoked vigorous debate over the appropriate valuations for stocks in today’s environment. The S&P 500’s decline through Friday is its worst year-to-date performance since 1970, according to Dow Jones Market Data.
One source of uncertainty is the rising concern that the Fed’s monetary tightening will tip the economy into a recession, a scenario in which equity multiples typically decline. Higher interest rates reduce the worth of companies’ future cash flows in commonly used pricing models. Already, some investors worry that the market’s expectations for corporate earnings are too high, given the economic hurdles ahead.
Michael Mullaney, director of global markets research at Boston Partners, which manages $91 billion, said he thinks the S&P 500 is fairly valued based on today’s rates but expects valuations to fall further.
The valuation of equities tends to fall during tightening cycles and earnings growth also tends to slow in these periods, even during stretches of time that aren’t marked by high…