The stock market has basically gone up in a straight line this year, with gains around 12%. While justified by fundamentals, I had thought it was a bit ahead itself. And I still think that.
Our data doesn’t indicate the market is parabolically overvalued, nor does it seem to point to a large sustained bear market. However, below I point out 3 positive reasons why we might be due for a pullback or correction in the 5% to 15% range.
- Earnings have been great. This has been the fundamental reason why stocks have traded higher. But perhaps they are too great? The higher the estimates the higher probability they will disappoint. Looking forward, are these estimates too optimistic?
Source: The Earnings Scout
- The market is calm, perhaps too calm. Volatility is historically low. Typically, we see volatility mean revert.
Source: The Daily Shot
- The market feels good about the future. But is the market pricing out too far into the future? The higher the multiple on the market the more speculative it becomes and the more it must be justified by earnings. The current forward 12-month P/E is 17.5x and the historical average is 16x, which is also where we were about a year ago (Source: JP Morgan).
Again, though we are long in the tooth the data doesn’t seem to indicate a big bear market is around the corner. Further, without a catalyst I am not sure what can push the market lower. It just appears as though caution is needed in the short-term.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment.
Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system.
S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability.
Forward price to earnings (forward P/E) is a measure of the price-to-earnings (P/E) ratio using forecasted earnings for the P/E calculation. While the earnings used are just an estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E analysis. The forecasted earnings used in the formula can either be for the next 12 months or for the next full-year fiscal period.