U.S. equities fell more than 9% in September, pushing year-to-date losses to roughly 24%. Only five calendar years have been worse, and three of those were during the Depression. Given the depth and breadth of the bear market, investors are asking a simple question: Have we bottomed? Last August, I suggested caution before chasing the summer really. At the time I cited three factors working against stocks: the Federal Reserve, the calendar, and the likelihood for softer earnings. Today I’d say the first issue is less of a threat, the second is turning positive and the third remains a question mark. The net effect is a still volatile market but one where downside and upside are becoming more balanced.
September’s losses brought stock valuations back to the year’s lows, with the S&P 500 trading down to approximately 15x next year’s earnings. While valuations dipped below these levels in early 2020 and late 2018, the post-COVID market premium has been eliminated. On a global basis, valuations have also mean-reverted and are now slightly below the long-term average (see Chart 1). Sticky inflation and an aggressive Fed can result in more multiple compression, but most of the adjustment has probably taken place.
Global equity price and earnings