https://www.wsj.com/articles/the-stock-market-is-on-sale-tha…
**The Stock Market Is On Sale. That Doesn’t Make It Cheap.**
**Valuations have plummeted at a record rate, but that’s before Wall Street has taken account of a slowing profit growth**
**By James Mackintosh, The Wall Street Journal, July 21, 2022**
**...**
**Unfortunately valuations were able to fall so fast because they were so high to start with. Unlike in 1999-2000, the only previous time they were higher on either the IBES forward PE or the Shiller PE measures, valuations were elevated primarily because bond yields were so low. Low bond yields made future profits much more attractive, pushing up the value of every dollar of those expected earnings. With bond yields soaring this year, it should be no surprise that valuations plunged.**
**Here we come to the bad news. Wall Street has only just begun to worry that earnings might fall too. Even as valuations were dropping, analysts continued to upgrade their forecasts for profits for most of the year—until a few weeks ago. Now forecasts are being slashed, and investors are increasingly convinced that a recession is on the way, which would crush earnings....**
**Almost all the fall in stocks up to early June was due to the effect of rising rates on valuations of those expected earnings, not the effect of tighter monetary policy on the economy reducing the earnings....** [end quote]
The Price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio)Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio) is about 30, almost double the historic median and about the same level as the 1929 bubble peak.
https://www.multpl.com/shiller-pe
If forward earnings drop, stocks will look even more expensive.
The market has responded to a “one punch” of higher interest rates by dropping 20% (more for many “high-growth” NASDAQ stocks). The market has not yet responded to the “one-two punch” of higher interest rates plus lower earnings caused by the higher rates (and possibly a recession). Not to mention that 10% of listed companies are “zombies” (according to the Fed) which might go bankrupt when they can’t roll over their immense debts.
Wendy