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Morgan Stanley expects further losses following recent gains in the S&P 500.
Time dreams
The stock market has enjoyed a mini-rally over the past few days, but recent gains appear to be in the midst of a major downturn.
The big indices have risen since Thursday afternoon
S&P 500
And
Nasdaq Composite
The lowest intraday level of the year is marked at 7 Since then, the two indices have risen 5.1% and 6.7%, respectively. Encouraging gains, Federal Reserve Chairman Jerome Powell had a remark that the Fed would not raise short-term interest rates as soon as possible because some fear war in the fight against inflation.
Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, doesn’t think profits will last. “Stocks seem to have started the market rally of other material bears,” he wrote. “After that, we are confident that low prices are still ahead.”
Why shouldn’t people accept profits at face value? Well, it’s no surprise that the stock has gained ground. The market was so buzzing that it seemed like begging would be bought.
At its lowest level on Thursday, the S&P 500 was down 12% from its 200-day moving average – a sign that stocks have slipped far from their long-term trend. The index was farthest from its 200-day moving average, lower than when the epidemic began in March 2020.
“It simply came to our notice then [the market] Was oversold, “said John Kolovos, chief technical strategist at Macro Risk Advisors.
Now, the market may just drop. The key issue in the case is the assessment, which is still arguably too much.
The S&P 500 is trading just over 17 times its consolidated earnings per share, which is expected to bring stocks to market benchmarks in the next 12 months, slightly less than 21 times at the beginning of the year. But that may not be enough.
The problem is that at that level, an investor pays for the index at 5.8% of the total EPS per dollar. That’s just 2.8 percentage points higher than the yield on the UltraSef 10-year Treasury note, which has risen this year. According to Morgan Stanley, the 2.8 percentage point is at its lowest level since the 2008-2009 financial crisis, so it is not too much to compensate investors for the risk of having the stock.
If investors hold back from stocks in the hope of higher returns, valuations may fall. Wilson’s target for the S&P 500 level is 3900, about 4% below current levels, assuming it is worth 16.5 times the forward income.
It may not sound too bad, but if the market is in a bad mood enough, the fall could be even worse. Wilson wrote, “We still think a fair price overruns from the negative side is possible.”
The S&P 500 will be in a bear market, if it drops to 3,837, 20% below its high. The stock is still not out of the woods.
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