On July 14, we made a case for the continuation of the current bear market and a prediction that the S&P 500 could bottom around 3,000-3,300 - corresponding to a drawdown of 31% to 37% from its peak. The S&P 500 was at 3,790 at the time. The timing of our article was particularly poor, given that we were just about to experience a significant bear market rally that pushed the S&P up more than 10% over the following weeks. After reaching its peak above 4,300 in mid-August, and on the back of an ever hawkish Fed, the S&P has since lost more than 15% and is now sitting below 3,700 points.
Sequence confirmed
The sequence of event is playing out as expected: after the first phase of multiple compression, it seems that we are now entering a period of negative earnings revisions. One of the most notable events of the past couple of weeks was FedEx slashing its Q2 earnings estimate by half. This view of lower 2023 earnings starts to be shared by analysts, as they are only starting to adjust their S&P price targets accordingly. With the relentless rise in yields (with the 10-year treasury now close to hitting 4%) as well as from the US dollar, we would not be surprised if we were to reach, or even overshoot, the lower range of our target range.
While many stocks are now below their June lows (including Alphabet or Microsoft), some large constituents are still holding up well - maybe a little too well. For instance, Apple and Tesla are sitting above their June lows by 15% and 30%, respectively. A 30% drop in those two names would bring the S&P in the low 3,500s, all else equal. Going lower on the indices hence doesn’t require heroic assumptions.
A little hope
Despite this bearish view, could have most stocks already bottomed? After all, many of the names that have experienced significant drawdowns year-to-date seem to be holding up relatively well - e.g., the XRT Retail ETF (not the most recession-proof ETF), is currently hovering around its June lows.
In addition, the number of stocks at new lows reached a YTD high a couple of days ago, and is now dropping despite the market going lower:
While every period is different, history can help us anticipate what may happen next. Every investor knows when the market bottomed during the Global Financial Crisis: March 2009.
But what is often missed is that the number of stocks making new lows peaked in October 2008 - 5 months before the S&P reached its bottom:
Looking at individual names, there does not seem to be a rule. Not only did Google bottom in November 2008. But also more economically-sensitive names like Kohl’s, Macy’s, or Ford. Meanwhile, arguably more resilient names only bottomed in March 2009, along with the market (Microsoft, Berkshire Hathaway, Philip Morris, Johnson & Johnson, or Wal-Mart).
And while we believe that the current bear market could have further to go, we cannot help but think that new lows could be history in certain areas of the market, given current sentiment and valuations.