Stocks Have Lost Sight of What’s Reasonable

The S&P 500 Index fell again on Monday, leaving the gauge down 9.88 percent from its all-time high in late September and on the cusp of a correction. (The Dow Jones Industrial Average did enter into a correction.) And yet, despite the turmoil, the dialogue seems to be starting to turn in a good way. Specifically, the debate has gone from guessing where the bottom is to determining the appropriate price to pay for equities in an environment where the economy is slowing from a sugar high to a normal rate of growth.

The big drop in the S&P 500 has left its forward price-to-earnings multiple below the five-year average for the first time since 2012, according to Bloomberg Intelligence. The index is now trading at 15.5 times expected earnings, the lowest since the tail end of the 2015-2016 correction in stocks and what Bloomberg Intelligence calls “historically reasonable levels.” Back then, the economy was expanding at a less than 2 percent rate. Now, economists are forecasting growth above 3 percent for at least this quarter and the start of 2019. “The sell-off appears to have overshot the fundamentals,” Goldman Sachs Group Inc. strategists led by David Kostin wrote in a research note Friday. They expect earnings-per-share growth of greater than 7 percent in 2019 will support a rebound in the S&P 500 toward 2,850 by the end of the year, a gain of almost 7 percent. “The resumption of discretionary buybacks should also provide a tailwind,” they added. But that’s hardly the consensus view. Stocks are selling off in ways that differ from other recent declines and it bodes badly for future performance, Morgan Stanley strategist Michael Wilson wrote in a research note Monday. “The rolling bear market continues to make progress and there is growing evidence that it is morphing into a proper cyclical bear market,” Wilson wrote.