Stocks Are Way Down. They’re Still Expensive.

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 inflation. That means investors must anticipate a potentially even more austere market environment in coming months.

What’s more, it is early yet in the Fed’s cycle, and Mr. Mullaney said he expects the central bank will need to lift its benchmark rate higher than is currently expected to curb inflation. By the end of the Fed’s campaign, he expects the S&P 500 to trade at about 15 times its projected earnings. Add in a recession, and the market’s valuation would likely fall to 13 or 14 times earnings, he said.

“We’re going to be in a volatile market until we get some concrete evidence that significant inroads have been made on quelling the inflation problem,” Mr. Mullaney said.

Bubble burst?

The market turbulence has drawn comparisons to the bursting of the dot-com bubble in 2000.

Analysts at

Citigroup Inc.

wrote this week that the U.S. stock market entered bubble territory in October 2020 and is now exiting that bubble, though they said equities aren’t as stretched as during the dot-com era.

Forward multiples climbed as high as 26.2 times earnings in March 2000. In the selloff that followed, they plummeted. By 2002, the S&P 500 traded at a low of 14.2 times its next year’s earnings. In 2008, when the country was in a severe recession, that figure hit 8.8.

While few stocks have been spared in this year’s tumble, technology and other pricey growth stocks have suffered the most acute pain. The Russell 1000 Growth index has fallen 24% this year, while its value counterpart has slumped 8.1%.

Members of the growth benchmark include

Apple Inc.,

whose shares are down 17% this year;

Microsoft Corp.

, down 22%;

Amazon.com Inc.,

down 32%; and

Tesla Inc.,

down 27%.

S&P 500 stocks, valuation vs. performance






The value gauge, by…

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