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If you’re thinking about pouring some idle cash back into the market while it’s still down, you’re not crazy and you’re not alone. The S&P 500‘s (SNPINDEX: ^GSPC) 20.4% discount from its January high is still a pretty attractive deal, even if the sale price was just a tad lower three weeks ago.
Of course, it’s only a bargain if there’s a reasonably good chance the market’s going to be higher within the next few months rather than lower.
And that’s the really good news here … at least potentially. While most stocks have already breached bear market territory and the economic news seems grim, corporate profits are apt to remain robust and even rekindle the growth expected when the world was shrugging off the pandemic last year.
The kicker: Stocks are a heck of a lot cheaper now than they were then, setting the stage for an unexpected rebound sooner than later.
Image source: Getty Images.
Actually, both earnings and growth are still looking healthy
For the record, nobody really knows where the market’s going to be six months from now, or for that matter, six days from now. Against a backdrop of rampant inflation, midterm elections, crimped oil supplies, and a myriad of other factors, investors as well as analysts are best-guessing even a little more than they usually do.
Given that investing is largely about balancing risk and opportunity, though, you should know there’s a (very) strong bullish argument to be made for stepping into stocks here, even if the market hasn’t yet reached its ultimate bottom. The argument is that stocks are almost as cheap as they’ve been at any point in the past decade, and earnings are still growing despite the apparent economic headwind.
The graphic below puts all of it in perspective. Assuming analysts’ expectations for the S&P 500 “earning” $54.84 per share for the second quarter of this year are on target, the index is priced at a trailing price-to-earnings ratio of 18.4. The S&P 500 was briefly priced near that valuation in 2018 when the market was running into a little turbulence, but prior to that, stocks haven’t been priced this low since 2014.
Data source: Standard & Poor’s. Chart by author.
Perhaps better still, earnings are expected to continue growing. While the S&P 500’s first-quarter bottom line of $49.36 was down from Q4’s, that’s not an unusual drop for the time of year. They were still up year over year, as the second quarter’s earnings are projected to be as well. Indeed, this year’s third- and fourth-quarter earnings are both expected to reach record-breaking levels for any quarter of any year, leading to record-breaking full-year earnings of $223.54 for the S&P 500. Look for yet another round of record earnings in 2023, up 11% from this year’s likely bottom line, which should be up more than 7% from 2020’s earnings.
What’s not to like?
By the way, the S&P 500 is currently priced at only 15.6 times next year’s projected profits. It’s been a long, long time since we’ve seen stocks valued at a forward-looking P/E that low and earnings were rising as briskly as they are now.
Clarity coming soon
Nothing is etched in stone, mind you. The analyst community could be collectively wrong about what’s coming. They could also be overlooking a calamity that will wreck these bullish forecasts. Never say never.
As it stands right now, though, the fear-based selling we’ve seen since the beginning of the year isn’t rooted in actual results. It may take the market a few more weeks to realize their mistake, which is fine — most bear markets end in October anyway. This one could end sooner or later than that. Regardless, there’s too much pent-up value in the broad market for it not to find a firm footing in the foreseeable future and start climbing again.
That’s the long way of saying, if you’re truly a long-term investor, then you should be using this dip as a buying opportunity.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
