How do you spell “capitulation?” F-E-A-R.
That’s what this market breeds, and there has been no escape from that wild bear out for your lunch. Putting it in the starkest black and white, the S&P 500 is down 14% from Jan. 3 to May 2, and the Nasdaq has lost 23% of its value since mid-November.
Let that sink in: For the S&P 500, it’s a loss of $5 trillion. For the higher-risk Nasdaq, the drop peeled off about $7 trillion of value, including many names also in the S&P 500. To put that in perspective, one of the largest fiscal stimulus programs in the nation’s history – the CARES Act of 2020 – engineered to save the country, was roughly $2 trillion.
In comparison, the gross domestic product of the United States, the value of goods and services produced in this country was $21 trillion in 2021, just three times this recent market implosion. It’s even a whole lot more than Elon Musk’s net worth.
April was gut-wrenching for investors
Six weeks ago, after the lows in March, I wrote a piece suggesting that the correction was presenting investors with bargains that they should begin to consider. It turns out that I was too early. Although the S&P 500 snapped back, ascending 11% in about two weeks, it failed to hold those gains and has given them all back plus more.
April’s 8.8% decline was, simply put, a gut-wrenching disaster for most investors, the type veterans like me have experienced enough to know that queasiness is an occupational hazard. Yet, we are sitting at roughly the same level of the S&P 500 where we were a year ago, and comparable to December 2020 for the Nasdaq. I wish someone with an accurate crystal ball had told me that a year and a half ago.
However, that never happens, so we look at the cold, hard stats of the market and analyze what we see. The S&P 500 trades at a multiple of 18.8 times this year’s estimated earnings and 17.2 times 2023 earnings. These numbers had come down from the beginning of this year when the price-earnings ratio was 21.5 times 2022 and 19.6 times 2023 estimated earnings, according to FactSet.
The market capitalization of the top five index stocks: Apple, Microsoft, Amazon, Tesla, and Alphabet, which trade, as a group, at 29 times earnings, pulls the S&P 500 overall multiple higher.
As the table below illustrates, if you exclude those five, the remaining 495 stocks sell for a price-earnings ratio of 16.7 times 2022 and 15.7 times 2023 earnings – far from a sky-high price valuation. Data is current as of the close on May 2.
(Note: The charts below show the top six companies to reflect Alphabet’s dual share class structure.)
Picking through the wreckage for bargains
There are now 137 stocks with market caps over $5 billion that are 40% or more below their six-month high, and 53 that are down at least 60%.
Patient investors should begin sifting through the wreckage of these cohorts to uncover attractive stocks on which to nibble. The most important variable (not an easy one) is whether these companies can achieve their per-share earnings estimates in a quickly changing inflationary and interest rate-rising environment.
Reading the charts will offer zero comfort for potential buyers of these depressed stocks that are all in technical purgatory, swamped from the top by huge amounts of “resistance.” My definition of that term is when numerous owners of a stock have lost so much money that they are willing to sell after any upward move.
While that remains true, technicians can’t really call the bottom until it happens. Deploying some sideline cash to invest in strong companies you may have been following for years could be a clever move. Let’s keep an eye on the FEAR index – we’ve been watching a horror film for months, and once everyone has shut their eyes, they can’t see the bargains.
Karen Firestone is chairperson, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.
