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Where Should Valuations Actually Be?

Todd R. Walsh Writes for Alpha Cubed Investments:


Lessons from the inflation battle of the early 1980s.


"When the markets are in a bear phase, “expert” predictions about the ultimate low start flying fast and furious. Every market analyst wants to be seen as the “genius” who figured it out so they can crow about it for the next decade—no matter how many other calls they might miss. During protracted market selloffs, a chorus of analysts typically estimate ever more extreme lows. Right now, many among this current group of bears are predicting a low price-to-earnings multiple of about 14x earnings on the S&P 500, while the more extreme of the bearish group are calling for a low of about 12x earnings. If we generously assume earnings of $220/share for the S&P 500 in 2023 (they could, of course, be lower), a 14x multiple imputes a target of ~3,080, while a multiple of 12x assumes a target of ~2,640. Those targets imply an additional drop in the index of approximately -23% and -34%, respectively, from the recent level of ~4,000. This decline would be in addition to the amount the S&P 500 is already down from the high that was set at the beginning of 2022, which is currently about -17% on a price basis (closing prices, excluding dividends from 1/3/2022 @ 4,796.56 to 4,000). Additional losses of the magnitude suggested above would put us close to the range of the damage suffered during the Global Financial Crisis, when the S&P 500 experienced a decline of over -50% on a price basis..."


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